
Class HB 



»7f 



Book. a ^72 
CoiMighf W f ^ ; 

COPYRIGHT DEPOSm 



POLITICAL ECONOMY 

Designed for Use in 

Catholic Colleges^ High Schools 

and Academies 



BY 



E. J. BURKE, SJ. 

PROFESSOR OF POLITICAL ECONOMY IN FORDHAM UNIVERSITY 

FORMERLY PROFESSOR OF POLITICAL ECONOMY IN 

HOLY CROSS COLLEGE, WORCESTER, MASS. 




AMERICAN BOOK COMPANY 

NEW YORK CINCINNATI CHICAGO 



HS*\ .Atv^ 



A 



Jmprimi Potest. 



l^m O^bstat. 



imprimatur. 



JOSEPH F. HANSELMAN, S.J., 

Provincial Mary land- New York Province. 



REMIGIUS LAFORT, D.D., 

Censor. 



4^ JOHN CARDINAL FARLEY, 

Archbishop of New York. 



New York, September 8, 191 2. 



Copyright, 1913, by 
E. J. BURKE. 



Copyright, 1922, by 
AMERICAN BOOK COMPANY 



Copyright, 1913, in Great Britain. 
E. p. 1 

MADE IN D. S. A. 



M -7 1922 

©CI.A677012 



A 

r 

^ PREFACE 

The purpose of this book is to present a general view of 
Political Economy with its various topics and problems, so as 
to enable the student and the general reader to understand the 
political and social questions that form matter of daily discus- 
sion. A special feature of the work is to show the Catholic 
doctrine wherever the subjects enter into or touch on the domain 
of Ethics. No particular effort has been made to bring in 
Catholic dogma or teaching. When the subject naturally in- 
troduces Catholic principles, they have been dwelt upon with 
the detail that has been thought necessary. 

Free use has been made of the numerous works on Economics 
already published. It would be impossible to enumerate all 
the authors who have been a help in the writing of these pages. 
Where immediate assistance has been found, credit is given to 
the sources, as far as possible. 

The book is the result of many years' teaching in the class- 
room, and no little credit is due to the intelligent and critical 
audiences the author has had during the time he taught the 
subject at Holy Cross College. 

No attempt has been made to pass judgment on all the vari- ' 
ous points that come up for discussion. It is not believed that 
a book of this nature should take sides on all open subjects that 
may appeal differently to different individuals. The book is 
designed to reach the minds of young people yet in a formative 
state, and its purpose is not to incline their opinion towards 
either side of disputable questions. The exposition of the prin- 
ciples of a science is one thing, the full practical application of 
each of those principles to actual cases is another. Hence the 

iii 



iv PREFACE 

endeavor has been to present both sides in all subjects that are 
recognized as matter of legitimate discussion, and to allow the 
reader to form his own opinion or judgment on the matter. 

The author takes this occasion to thank very sincerely those 
whose encouragement has made the publication of this volume 
possible, and to express his obligations to the writers on eco- 
nomic subjects of whose works he has freely made use. 



CONTENTS 



CHAPTER I 



DEFINITION. METHOD. SCHOOLS. Pages 1-3 i 

I. Definition of Political Economy. 
Definition and explanation 
Political Economy a science . 
Political Economy a practical science 
Political Economy subject to Ethics 
Political Economy distinct from Ethics 
Political Economy subordinate to Political Science 

II. Method of Political Economy. 

Subject matter of Political Economy 
Method of Political Economy 

III. Schools of Political Economy. 

The Mercantile System . 
The Liberal School : 

Tenets 

Branches of the Liberal School : 
(i) Physiocrats 

(2) Adam Smith and his followers 

(3) French School . 

(4) Manchester School . 

(5) Moderate Liberal School . 

(6) Eclectic School 

(7) Austrian School 

(8) Mathematical School 
The Socialist School : 

Explanation and definition 
Principles of Socialism 
Defenders of Socialism 
Branches of Socialism : 
(i) Agrarian Socialists . 

(2) State Socialists 

(3) Evangelical Socialists 

(4) Anarchists 
The Catholic School : 

Representatives .... 
Position of the Catholic School . 
Principles of the Catholic School 
The Historical School : 

Explanation .... 
Principles of the Historical School . 



10 
II 
12 
12 
12 
12 
12 



13 
15 
16 

17 
18 

19 
19 

20 
21 

24 

29 
29 



Vi CONTENTS 

CHAPTER II 

THE STUDY OF ECONOMICS. WEALTH. VALUE. 
PRICE. Pages 32-65 

PAGE 

I. The Study of Economics. 

Divisions of Political Economy 32 

II. Wealth. 

Definition of wealth 33 

Wants 33 

Objects capable of satisfying wants 34 

Objects procured by labor 35 

Objects exchangeable . 35 

Immaterial goods as wealth -36 

Money as wealth 36 

III. Value. 

Value in general 37 

Economic value ......... 38 

Value in use ; value in exchange ...... 38 

Cause of value 39 

Various theories of value 40 

Labor as a cause of value 40 

Marginal value 42 

IV. Price. 

Definition and explanation of price ..... 44 

Scholastic doctrine of price 45 

Market price . 47 

Exchanges .......... 47 

Variations of prices 51 

Prices and competition . 56 

Monopoly price 61 

Price fixed by law 63 



CHAPTER III 

PRODUCTION. FACTORS OF PRODUCTION. Pages 66-99 

I. Production. 

Definition and factors . 66 

Kinds of production 67 

Product 67 

Cost of production 68 

Productive industries 69 

End of production 70 

Laws of production 71 

Factors of production . . . . . . » -72 



CONTENTS 



Vll 



II. Nature. 



Place of Nature in production 
Law of Diminishing Returns . 
Intensive and extensive production 
Law of Diminishing Returns illustrated 



III. Labor. 



Definition of labor . 

Requisites of labor : 

(i) Movement . 

(2) Toil or pain 

(3) Time . 
Laboring Class 
Efficiency of labor : 

(i) Physical helps 

(2) Mental helps 

(3) Moral helps 
Hierarchy of labor 

Law of Population — Doctrine of Malthus 
Doctrine of Malthus rejected 
Hindrances to production 
Division of labor : 

(i) In the nation 

(2) In the workshop . 
Advantages and disadvantages of the division of labor 
Machinery 

Advantages of machinery 
Disadvantages of machinery 



IV. Capital. 



Definition of capital 
Capital essential to production 
Capital requires labor . 
Capital results from saving . 
Capital is consumed in production 
Kinds of capital . . . , 
Increase of capital . . . . 



PAGE 

72 

73 
74 
75 

77 

77 
78 
78 
79 

79 
80 
80 
81 
82 
86 
88 

89 
90 

91 
92 
92 
93 



94 
95 
95 
96 

97 
97 
97 



CHAPTER IV 



EXCHANGE. Pages 100-104 

Explanation of exchange 100 

Advantages of exchange . 100 

Mechanism of exchange . loi 

Middlemen or traders . 102 

Transportation 104 



Vlll 



CONTENTS 



CHAPTER V 



I. 



11. 



III. 



IV 



MONEY. Pages 105-118 

PAGE 

Origin and Development of Money. 

Development of money ........ 105 

Properties of gold and silver as money . . . . . 107 

Definitions of money 107 

Kinds of Money. 

Coin or value money 109 

Paper or credit money . . , . . . . .109 
(i) Defects of paper money ...... no 

(2) Effect of paper money on national wealth . . .111 

(3) Signs of over-issue of paper money , . . .112 

Money of Account . 113 

Kinds of money in the United States . • . . . 113 

Functions of Money. 

Medium of exchange . . . . . . . • nS 

Measure of value 116 

. 117 



Standard of deferred payments 

Coinage. 

Definition ..... 
Seigniorage ..... 
" Right," " heavy," " light " money 



117 
117 
118 



CHAPTER VI 



I. 



II. 



MONEY AND PRICES. GRESHAM'S 


LAW. 


Pages 119-] 


33 


. Money and Prices. 






Relation between money and prices 




119 


Variations in money 






120 


Laws of prices 








120 


Supply of money . 








121 


Demand for money 








122 


Stringency 








124 


Commodities and prices 








124 


Laws of prices illustrated 








125 


Distribution of money . 








127 


. Gresham's Law. 






Statement of Gresham's Law 




128 


How money disappears . 


. 




129 


Historical instances 


. 




131 


Operation oi Gresham's Law . 


. 




132 


Limitation of Gresham's Law 


. 


. 




133 



CONTENTS 



IX 



CHAPTER VII 

BIMETALLISM AND MONOMETALLISM. Pages 134-142 

Definitions ........ 

Kinds of bimetallism 

Ratio .......... 

Historical sketch of bimetallism in the United States 
Arguments of the bimetal! ists ..... 

Arguments of the monometallists .... 



134 
134 
134 
13s 
140 
141 



CHAPTER VHI 

INFLATION AND CONTRACTION. DEPRECIATION. 
MULTIPLE TENDER. Pages 143-159 

I. Inflation and Contraction. 
Inflation .... 

Contraction .... 
Effects on productive industries 
Crises ..... 
Remedy in long-term contracts 

II. Depreciation of Money. 

Explanation of depreciation .... 
Historical sketch of the precious metals 
World's production of gold and silver . 
Effect of depreciation on society . 
Instances in history of great increase of money 
III. Multiple Tender. 

Money as a standard of deferred payments . 
Remedy proposed : Multiple tender 



143 

144 

145 
146 

147 

148 
149 
151 
153 
156 

157 
157 



CHAPTER IX 



CREDIT. Pages 160-170 




Definition 


. 160 


Instruments of Credit : 




I. Book credit . . . ... 


. 160 


2. Promissory notes ...... 


. 160 


3. Checks 


. 161 


4. Bank notes 


. 162 


5. Bills of exchange or drafts .... 


. 162 


Kinds of bills of exchange .... 


. 163 


Use of bills of exchange .... 


. 163 


Origin and function of bills of exchange 


. 163 


Rate of exchange ...... 


. 166 


Factors determining rate of exchange . 


. 167 


Favorable and unfavorable rate of exchange 


. 168 


Variation of rate of exchange . . . . 


. 169 



X 



CONTENTS 



CHAPTER X 

BANKS AND BANKING. Pages i 71-193 

Definition .... 
Kinds of banks 
Organization and nature : 
(i) Federal reserve banks 

(2) National banks . 

(3) State banks 

(4) Private banks 

(5) Loan and trust companies 

(6) Savings banks 
Functions of federal reserve banks 
Functions of other commercial banks 

(i) Discounting negotiable paper 

(2) Receiving deposits 

(3) Buying and selling exchange, coin, and bullion 

(4) Making loans .... 

(5) Giving bank credit to merchants 

(6) Loaning money on farm land 

(7) Establishing branch banks in foreign countries 
Functions of loan and trust companies 
Functions of savings banks . 



PAGE 

171 
171 

172 
176 
182 
182 
182 

183 
184 

185 
186 
186 
186 
188 
190 
190 
190 
191 



CHAPTER XI 

HISTORY OF BANKING. Pages 194-221 

I. History of Banking in General 

II. History of Banking in the United States : 

1. Bank of the United States ..... 

2. Independent treasury system ..... 

3. State banks ........ 

4. National bank system : 

Constitution and growth ..... 
Defects of the national bank system : 
(i) Origin of the national bank system 

(2) Isolation of the several banks 

(3) Reserves . . . ... 

(4) Congestion of money in money centers 

(5) The independent treasury system 

(6) Inelastic currency ..... 

(7) Lack of banks in many districts . 
Remedies proposed for the evils of the national bank 

system : 
(i) Reestablishment of the United States Bank 

(2) A federated bank 

(3) Aldrich plan 

(4) Branch banks 



194 

195 
197 



200 



202 

202 

203' 

204 

204 

205 

209 



209 
210 
210 
212 



CONTENTS 



XI 



PAGE 

(5) Government guarantee of deposits . . . 213 

(6) Asset or credit currency 215 

(7) Emergency currency 217 

5. Federal reserve system 219 

CHAPTER XII 

POSTAL SAVINGS BANKS. LAND BANKS. BANKING 
SYSTEMS OF OTHER COUNTRIES. Pages 222-231 

Postal savings banks 222 

Federal land banks and joint stock land banks . . . .225 
Banking systems of some other countries: England . . .227 

France 228 

Germany . . . . . . . . . .228 

Canada . . . . . . . . . .228 

Scotland 230 



CHAPTER XIII 

INTERNATIONAL TRADE. BALANCE OF TRADE 
AND BALANCE OF ACCOUNTS. CUSTOMS DUTIES. 
Pages 232-247 

I. International Trade. 

Causes ..... 

Effects 

Advantages .... 

Extent of international trade 
Domestic commerce 
Consular service 
Foreign payments . 
11. Balance of Trade and Balance of Accounts 
Balance of trade ...... 

Items entering into the balance of accounts . 
Correlation between imports and exports 

III. Customs Duties. 

Definitions 

Tariff 

Protectionist poHcy of the United States 

Methods to replace protection 

Contractual system ..... 



232 
233 
233 
234 
235 
236 

237 

238 

239 
241 

242 

242 

243 
246 
246 



CHAPTER XIV 

PROTECTION AND FREE TRADE. Pages 248-275 

Historical Sketch. 

Historical sketch of protection . . 



248 



Xll 



CONTENTS 



II. Effects and Principles of Protection. 

Protection invites capital to take up new industries 

Does protection increase the labor and capital in a coun- 
try? 

Protection establishes less productive industries 

Protection should be temporary ..... 

The burden of raised prices under protection falls on 
the consumer ........ 

Protection should be limited ...... 

Protection reduces foreign trade ..... 

Protection causes international animosities 
9. Protection does not increase the general rate of wages in 
a country ......... 

III. Arguments for Protection. 

General argument . 

More specific arguments 

IV. Arguments for Free Trade . . . . . 



I. 

2. 

3- 
4- 

5- 

6. 
7- 



PAGE 

254 
256 

258 
260 
261 
262 

263 



266 
267 

272 



CHAPTER XV 



TRANSPORTATION. RAILROADS. Pages 276-293 




Transportation aids production ...... 


. 276 


Kinds of transportation . ...... 


. 277 


Growth of railroads ....... 


. 278 


Cost of railroads ........ 


279 


Conditions affecting railroad building .... 


279 


Groups of railroads 


281 


Business of railroads . . . . . • , • 


281 


Railroads as private concerns and as public concerns 


282 


Consequences of these two facts ..... 


283 


Power of railroad managers ...... 


285 


Overcapitalization 


286 


Railroad charges ........ 


287 


Classification 


290 


Discrimination 


291 



CHAPTER XVI 



REMEDIES FOR RAILROAD EVILS. GOVERNMENT 

OWNERSHIP OF RAILROADS Pages 294-306 
Remedies for Railroad Evils. 

Evils of railroads 294 



Remedies 

1. Action at law . . . . 

2. State commissions 

3. Interstate Commerce Commission 



29s 
296 
296 



CONTENTS 



A. 

XUl 



II. Government Ownership of Railroads. 

Arguments for government ownership . . . , 
Railroads in foreign countries . . . . , 
Motives for government ownership in foreign countries 
Objections to government ownership . . . . 



PAGE 



299 
300 
303 
304 



CHAPTER XVII 



CORPORATIONS. TRUSTS. Pages 307-324 



I. Corporations. 

Methods of doing business 

1. Individual establishment 

2. Partnership . 

3. Corporation . 

The corporation charter 

4. Trust .... 
Advantages of corporations . 
Objections to corporations 



307 

308 

308 
308 
309 
309 
309 
310 



II. Trusts. 

Definition and explanation 314 

Motives for the formation of trusts 315 

The trust problem 317 

Remedies for the evils of trusts : 

(i) State laws . . . . . * . . . . 319 

(2) Sherman Antitrust Law 320 

(3) Clayton Trust Bill 321 

(4) Federal control of trusts 322 

(5) Federal Trade Commission 323 



CHAPTER XVIII 



GOVERNMENT REVENUE. TAXATION. PUBLIC 
DEBTS. Pages 325-348 

1. Sources of Revenue. 

Public domains and public businesses 325 

Fines ........... 327 

Fees 327 

Assessments 329 

Taxes 329 



XIV 



CONTENTS 



II. Taxation. 



PAG£ 



Right of the state to tax .... 


• 330 


Kinds of taxes 


• 33<^ 


Direct taxes : 




(i) Poll tax 


• 331 


(2) Property tax 


• 331 


(3) Occupation tax .... 


• 332 


(4) Income tax 


• 333 


(5) Inheritance tax .... 


• 334 


(6) Corporation tax .... 


• 335 


Indirect taxes : 




(i) Internal revenue taxes 


. 335 


(2) Export duties 


. . • 336 


(3) Import duties 


• 336 


(4) Stamp taxes on papers 


• 337 


Incidence and shifting of taxes 


• 337 


Principles of taxation 


. 340 


. Public Debts. 




Public loans 


. 346 


Public debts 


. 346 



CHAPTER XIX 



INSURANCE. Pages 349-369 



Definition ..... 
History ..... 
Present extent of insurance business 
Nature and advantages 
Theory ..... 
Joint-stock companies 
Mutual companies 
Premium ..... 
Policy ..... 

Reinsurance .... 
Kinds of insurance : 

(i) Personal insurance . 

(2) Property insurance . 
Tife insurance .... 
Fire insurance . . . 
Industrial insurance : 

(i) Workingmen's insurance in general 

(2) Definition of industrial insurance 

(3) Growth .... 

(4) Advantages 

(5) Objections to the system . 

(6) Answers to the objections 

(7) Remedy .... 



349 
349 

350 
352 
353 
357 
357 
357 
357 
357 

358 
358 

359 
361 

363 
364 
365 
365 
365 
366 

367 



CONTENTS 



X\^ 



• CHAPTER XX 

CONSUMPTION. SPENDING. SAVING. INVESTING. 
POVERTY. Pages 370-382 

PAGE 

I. Consumption. 

Definition .......... 370 

Kinds of consumption ........ 370 

Explanation .......... 370 

Subjects discussed under consumption 372 

II. Spending. 

Means of reducing expenditure : 

(i) Living in common 372 

(2) Cooperative associations 373 

(3) Building associations ....... 373 

Luxury . . . . - 373 

III. Saving. 

Conditions for saving 374 

Institutions for saving '375 

IV. Investing. 

Ways of investing : 

(i) Loans 375 

(2) Business . . . 375 

Conditions for investing : 

(i) Security 376 

(2) Profits 376 

V. Poverty. 

Explanation of poverty ........ 377 

Causes of poverty . . . 378 

Remedies for poverty . . . . . . . -379 

Relief of the unemployed 380 



CHAPTER XXI 

DISTRIBUTION. RENT. INTEREST. Pages 383-413 
Distribution. 

Explanation ....... 

The Catholic view ..... 

Socialist solution of the problem of distribution : 
(i) Equal sharing ..... 

(2) Sharing according to wants . 

(3) Sharing according to merits or capacities 

(4) Sharing according to labor . 
Cooperation ....... 

The Catholic School ..... 

Parties to distribution 



383 
385 

387 
390 
390 
391 
39 T 
392 
392 



XVI 



CONTENTS 



II. Rent. 

Definition 

Ricardo's theory of rent 

III. Interest. 



Definition 
Historical sketch . 
Consideration of the attitude 

interest 
Objections to interest 
Theories of interest : 
(i) Productivity 

(2) Use . 

(3) Abstinence . 

(4) Labor . 

(5) Time . 
The Socialist theory 

Rate of interest 



of the Church 



with regard to 



393 
395 



400 
401 

404 
408 

409 
409 
409 
410 
410 
410 
411 



CHAPTER XXII 

PROFITS. Pages 414-435 



The manager 








. 414 


What constitute profits 








. 416 


Principle regulating profits 








. 418 


Relation between profits and wages . 








. 422 


Objections to profits .... 








. 426 


Means proposed to do away with profits 








• 427 


(i) Stock companies 








. 428 


(2) Profit sharing .... 








. 428 


(3) Productive cooperation . 








. 432 



CHAPTER XXIII 

WAGES. Pages 436-463 

Definition and explanation 

Historical sketch ..... 

Time wages ; piece wages 

Real and nominal wages .... 

Causes of differences between real and nominal 

Theories of wages 

General law of supply and demand 
Wages-fund theory .... 

Iron law of wages ..... 
Productivity theory of wages 
Catholic doctrine of wages ... 



wages 



436 
436 
439 
439 
440 

444 
445 
448 
451 
453 
454 



Index 



465 



POLITICAL ECONOMY 

CHAPTER I 

DEFINITION. METHOD. SCHOOLS 

I. Definition of Political Economy 

Definition and Explanation. — There are as many definitions 
of Political Economy as there are treatises on the subject. It 
would be useless and confusing to detail them all. It is essen- 
tial, however, to formulate some definition, which may explain 
the view we are going to take of the science. 

A definition of a science may be arrived at through the con- 
sideration of the subject matter of the science. Now, some 
economists conceive that the subject matter of the study of 
Political Economy is restricted to wealth and the processes by 
which wealth is produced, consumed, and distributed. They 
do not take account of man or of society or of the higher interests 
of the moral order. They formulate their definition of the sci- 
ence in accordance with this view. 

Other economists conceive the subject matter of Political 
Economy to embrace human activity in its relation to the 
wealth-producing factors of the world. They hold that the 
activity of man as well as the end of that activity comes within 
the scope of the science. 

We take this second view. We consider that Political Econ- 
omy has to do not only with the mere concrete, material things 
that enter into the science, but also with the personalities 
of the members of society whose activity is exercised on these 
concrete, material things. And from this point of view of 

POL. ECON. — I I 



2 DEFINITION OF POLITICAL ECONOMY 

the subject matter of Political Economy, we formulate the 
definition : — 

Political Economy is the science that establishes the laws of 
human activity with reference to the material interests of 
society. (Cf. Antoine, Cours d'economie sociale, p. 6.) 

Political Economy a Science. — A science is defined as a sys- 
tematic body of knowledge gained by observation, experiment, 
and reasoning. Now, Political Economy seeks after knowledge 
of wealth, of its production, distribution, and consumption. 

It makes use of observation, observing the conduct of various 
peoples in their efforts to acquire wealth ; observing the various 
agents, whether moral or physical, that influence the increase or 
decrease of wealth ; observing the various factors, — land, labor, 
capital, exchange, social organizations, money, trade, property, 
— and the correlations that exist among them. 

Political Economy does not deliberately experiment, but 
there is constant experiment going on among nations. History 
is filled with the experiments made in the past by the several 
nations in their efforts after material success. 

From this observation and this experimenting, Political Econ- 
omy deduces conclusions which have all the force of laws. Thus, 
Political Economy is a science. 

But it may be said that the laws of Political Economy are not 
laws at all. Man and man's will endowed with the gift of free- 
dom enter into the subject of Political Economy, and hence there 
can be established no fixed laws, no laws that will have any cer- 
titude, no laws on which one can hold anything certain for the 
future. There will always be variation and uncertainty when 
there is freedom of action. Here we must explain. 

The laws deduced by Political Economy may be of three 
orders : — 

I. Laws that affect man as a rational being destined to a 
higher life of a supernatural order; that regard the free acts of 
man and define the scope of their activity within the limits of 
the moral code. These laws will have absolute metaphysical 
certitude. 



POLITICAL ECONOMY A SCIENCE 3 

2. Laws that relate to the constant manner in which free 
agents (men) act in identical circumstances. These laws 
will have moral certitude. They are not possessed of the 
same inflexible nature as are the laws of physical science. They 
impose no obligation or absolute necessity. They are founded 
on human liberty, and may be modified according to circum- 
stances. Still, they are true laws, moral laws, as they are called, 
" the expression of certain constant relations in the acts and pro- 
ceedings of men." (Gide, Principles of Political Economy, 
1900 edit., p. II.) 

3. Laws that relate to the concrete, material things that enter 
into the science, such as land, money, trade, credit, etc. They 
determine the actions and reactions of external bodies, and here 
the laws have physical certitude. 

The laws of Political Economy may again be classified thus : 
(i) obligatory moral laws; (2) historical and directive moral 
laws ; (3) physical laws. 

Examples : Of the first — It is forbidden to lie or cheat in com- 
mercial transactions. 

Of the second — When times are good, the cost of living low, and 
wages high, marriages are frequent among the working classes. 

Of the third — When money is plentiful, the rate of interest is 
low. The rate of exchange of bills of exchange will vary with 
the number of bills in the market. 

Political Economy is therefore a science. It is a science the 
province of which is to trace wealth to its causes, which lie in 
the activity of man as applied to the wealth-producing materials 
offered by nature, and to discover the laws according to which 
wealth is produced, consumed, and distributed. 

Political Economy a Practical Science. — In view of the end 
that is sought to be attained, a science may be Speculative or 
Practical. A speculative science rests in the mere contemplation 
of an object ; it deals in a purely abstract consideration of a 
subject, having no reference to the practical conduct of the 
individual who applies himself to it. Thus, Pure Mathematics 
and Metaphysics are speculative sciences. 



4 DEFINITION OF POLITICAL ECONOMY 

A practical science considers principles in so far as they are 
rules of conduct, in so far as they determine, direct, and control 
the operations of rational beings. Thus, Moral Theology, 
Medicine, are practical sciences. Now, Political Economy con- 
siders wealth not merely in its abstract, transcendental elements, 
but with reference to its production, consumption, and distribu- 
tion through the free activity of the members of society. There- 
fore, Political Economy is a practical science. 

Political Economy Subject to Ethics. — Is Political Economy 
connected with Ethics? There are some economists who hold 
that Political Economy has nothing to do with Ethics. Such is 
the opinion of most economic writers of the old schools, of Yves 
Guyot, Maurice Block, Rossi, Stuart Mill, Cherbuliez, Ricardo, 
Bentham. Others hold that Political Economy is a special 
branch of Ethics. Thus, Liberatore, Devas, De Pascal, Ott. 
We hold that Political Economy is distinct from Ethics, but is 
dependent on Ethics. Thus, Pesch, Costa-Rossetti, Cathrein, 
Von Brants, Bechaux. 

Ethics is the science that directs human actions according to 
the principles of right reason. Ethics embraces within its 
scope all the actions of man, all the activity of man, whatever 
may be the field in which that activity is employed. But it is 
clear from our definition of Political Economy that the activity 
of man is employed in the producing, consuming, and distribut- 
ing of material goods. Political Economy, therefore, is subject 
to the laws of Ethics. 

Can it be believed that there shall be no moral restraint upon 
society in the matter of the producing of wealth, that there is 
no restriction ethically as to the manner of using wealth, that 
the moral law shall not enter into the questions of property 
rights, social organizations, wages? Man does not lose his ra- 
tional moral character by entering into society, and Political 
Economy cannot formulate laws with regard to wealth that 
antagonize the laws of Ethics. If Political Economy w^ould 
justify its claim to the rank of a science, the principles it deduces 
must not oppose the principles deduced by another and a higher 



POLITICAL ECONOMY AND ETHICS 5 

science. Science is knowledge. Knowledge is the possession of 
truth. Truth cannot oppose truth. When Political Economy, 
therefore, attempts to lay down principles that run counter to 
the acknowledged principles of Ethics, it so far ceases to be 
a science. 

Political Economy Distinct from Ethics. — Political Economy 
is, however, distinct from Ethics, because the subject matter of 
Political Economy, viz. the direction of man's acti\dty with 
regard to wealth or temporal interests, differs from the subject 
matter of Ethics, viz. the direction of man's activity with regard 
to his eternal and spiritual interests. 

As already stated, very many economists of the Liberal School 
deny the union between Political Economy and Ethics. The 
opinions of some of the more important may be summed up as 
follows : — 

Yves Guyot — Political Economy is in itself unmoral. The 
use one makes of its laws is alone moral or immoral. 

Block — Political Economy is a science, the gaining of 
knowledge. Scire (the knowing of a thing) does not come within 
the scope of Ethics, but velle (the willing of a thing) does. Ethics 
affects the will. 

Rossi — Political Economy is a science, not an art. It per- 
tains to the intellect, not to the will. 

Stuart Mill — Political Economy has to do only with the 
acquisition of wealth. 

Cherbuliez — Political Economy takes no account of the 
ethical value of its laws. Ricardo, Bentham, hold the same. 

In refutation of the above opinions, it may be here briefly 
stated that Political Economy is not a speculative science. It is 
a practical science, which stands midway between speculative 
science and art. Political Economy cannot eliminate or abstract 
from the morality of man's actions, whatever be the sphere of 
man's activity. Every volitional act of man is imputable 
to man, is deserving of either praise or blame, and comes within 
the domain of morality. 

A reaction has set in among modern economists, and many ad- 



6 METHOD OF POLITICAL ECONOMY 

mit a connection between the two sciences. Thus, Cauwes, 
Gide, Baudrillart, De Laveleye, Bechaux, Minghetti, Schonberg. 
Leroy Beaulieu declares that " I'economie politique fait bon 
menage^ avec la morale." {Traite d'economie politique, 1, p. 78.) 
Political Economy Subordinate to Political Science. — Is 
Political Economy connected with Social or Political Science? 
The end of Social or Political Science is to procure the common 
temporal good of the citizens. It has many branches : Law, 
Politics, Statecraft, Education. Political Economy also comes 
within its range, since it studies the wealth of the members of 
society, a part of the temporal good. It is subordinate, there- 
fore, to Political Science, and in case of conflict between its 
principles and those of Political Science, Political Economy, 
which seeks but a part of the temporal good, must yield to that 
science which seeks the whole temporal good of society. 

11. Method or Political Economy 

Subject Matter of Political Economy. — The method em- 
ployed by Political Economy in seeking after knowledge will 
depend on its subject matter. The subject matter of Political 
Economy consists of the relations of men among themselves and 
of the relations of men with the external world in their pursuit 
of material goods. Hence, its subject matter is threefold : — 

1. Man as a social being, bound by the moral law and destined 
to eternal life in the supernatural order ; 

2. The external world governed by physical laws ; 

3. Human activity, or the relations between man and the 
material things upon which he exercises his activity. 

Method of Political Economy. — The subject matter of Polit- 
ical Economy, therefore, is partly speculative and partly prac- 
tical. Such being the case, the method employed by Political 
Economy cannot be purely inductive — from facts and experi- 
ments to conclusion — or purely deductive — from premises to 

1 An expression usually applied to a husband and wife who live happily together. 
'PoHtical Economy Hves happily with Ethics." 



THE MERCANTILE SYSTEM 7 

conclusion. It makes use of speculative reasons and of the 
data of experience. It bases its conclusions on the nature and 
the duties of man, as also on an investigation of nature, labor, 
capital, exchange, the consumption and distribution of wealth. 

Under deduction. Political Economy (i) takes cognizance of 
the moral laws — set forth in Ethics — which direct man to his 
ultimate end, in so far as they bear relation to economics ; 
(2) determines the general means to be employed in the produc- 
tion, the consumption, and the distribution of wealth ; (3) de- 
termines the practical employment of human activity in con- 
formity with the first and second functions. 

Under induction, Political Economy takes up (i) the study of 
facts as confirmatory of the general principles of human activity; 
(2) the teachings of history ; (3) the study of facts as determining 
in special cases the application of general principles. 

For the Catholic economist the sources of the ethical prin- 
ciples that enter into Political Economy are (i) dogmatic truths ; 

(2) the teachings of the Church, e.g. the Encyclicals of Leo XIII, 

(3) the Natural Law and its applications as made by Moral 
Theology. 

III. Schools of Political Economy 

The Mercantile System. — Before entering upon the enumera- 
tion of the various schools of Political Economy, it will be well 
to make mention of the system which held sway almost univer- 
sally before the rise of the Liberal School in 1765. That system 
is known as the Mercantile System. 

It held that wealth consisted exclusively of money. The more 
actual money a country had, the more wealth it had. The main 
purpose of the state was to increase the store of money, and the 
chief means of increasing this store was commerce. Hence, 
commerce was to be encouraged. The export trade should sur- 
pass the import trade, and the amount of the surplus of the former 
over the latter would indicate the gain in specie or coin. 

Thus, if goods produced within a country be sold within the 
country, the money remains within the country, but there is no 



8 SCHOOLS OF POLITICAL ECONOMY 

increase in wealth ; if, on the contrary, the goods be sold abroad 
and cash be received for them, there is an increase in specie. 

Imports show an outgoing of coin, for we must pay money for 
the foreign goods we receive, and the money thus goes abroad. 
If imports equal exports, there is no gain. The state, therefore, 
according to the Mercantile System, should encourage export 
trade by any means possible. It might do so by bounties; 
e.g. if a firm produces for export trade $100,000 of goods, then 
for every $10,000 more it exports, the government might pay 
it $1000 bounty. The state should discourage import trade by 
duties, except where the import trade would bring in raw ma- 
terial which would be manufactured at home into the finished 
product and exported again under the new form. The " balance 
of trade " was to be secured for the country. The balance of 
trade is in favor of a country when the exports exceed the 
imports. 

Colbert, minister of Louis XIV, carried out the principles of 
the Mercantile System in France, and it prevailed in England 
during the sixteenth, seventeenth, and much of the eighteenth 
centuries. 

The system is discredited to-day, because some of the fun- 
damental principles of the system are either not accepted at all 
or are accepted in a very modified form. Thus, the importance 
of specie is changed through the introduction of instruments of 
credit. Gold is recognized as a medium of exchange rather than 
as an object that is to be sought after and stored away. The 
balance of trade is not to-day the sole indication of the prosperity 
of a country. There are other items that balance accounts be- 
tween nations besides their exports and imports. (Cf. p. 239.) 

The chief modern schools of Political Economy are four : the 
Liberal, the Socialist, the Catholic, the Historical. 

The Liberal School ; Tenets. — The Liberal School has for 
its motto " Liberty." It demands absolute individual liberty in 
economics, and abstention of the state from all interference not 
absolutely necessary in the affairs of the individual. Liberty, it 
says, is the great, the only, source of progress, of harmony, 



THE LIBERAL SCHOOL 9 

and of social peace. In further detail, the tenets of the Liberal 
School are as follows: — 

There must be freedom for the laborer to determine for him- 
self the nature, the duration, and the place of his labor, to make 
whatever kind of labor contract he may find most advantageous 
to himself. 

Through this freedom of labor there will result a natural dis- 
tribution of the labor forces among the different trades and 
businesses, a just equilibrium betw^een the factors supply and 
demand, the greatest amount of diligence and energy on the part 
of labor, and finally the greatest possible productivity of all the 
different labor forces. 

There must be freedom for the landowner to use his land as he 
pleases, to dispose of it as may suit his own profit or convenience, 
by sale, mortgage, division, bequest, or gift, to dispose of the 
product of his land so as to derive the greatest possible returns. 

There must be freedom for the capitalist in matters of loans, 
capitalist associations, the formation of stock companies and 
trusts, the undertaking of new industries, the employment of 
labor, the amount of wages paid, and the duration of labor hours. 

The rate of the wages of the laborer is to be determined by the 
law of supply and demand. Labor is a commodity and its price 
is to be fixed, according to the Liberal School, by the same laws 
that regulate the prices of every other exchangeable product. 
No ethical or humane considerations should enter into the labor 
contract formed between employer and laborer. 

Self-interest is the fundamental motive of all men's actions, 
and if unrestrained will infallibly lead men to act for the common 
good. 

The present state of society, with its laws, institutions, capital- 
ists, laborers, and wage system, is the outgrowth of nature. The 
world is the best possible. The present conditions are the best 
not only relatively but absolutely. If all the various forces of 
production, consumption, distribution are left to themselves, 
they will ultimately and infallibly work out the perfection of 
the individual and the community, by virtue of inherent and 



lO SCHOOLS OF POLITICAL ECONOMY 

necessary laws by which their energies and the relations that 
subsist between them are determined. 

To give full play to this absolute liberty demanded by the 
Liberal School, the government must not interfere in matters 
economic except when liberty itself is menaced. Hence the 
famous saying : Laissez faire, laissez passer,'^ which has become 
the shibboleth of the Liberals. 

To the principle of freedom of the individual is added the prin- 
ciple of free competition. Competition must be allowed full 
sway among individuals and corporations, in home and foreign 
trade. This latter principle, it is claimed, will bring about the 
highest degree of perfection in all kinds of industries. It is a 
providential law of harmony. It will be productive of a supply 
of commodities suited to the demand, of the best kinds of com- 
modities, of low prices. 

The Liberal School is conservative, argumentative, aprioristic, 
metaphysical, deductive. From general principles, it arrives at 
conclusions which are supposed to have the force of immutable 
laws. 

The followers of the Liberal School are, in England, Smith, 
Ricardo, Malthus, Senior, Stuart Mill; in France, J. B. Say, 
Bastiat, Cournot, J. Garnier. 

Branches of the Liberal SchooL — There are several periods 
in the development of the Liberal School, and in each period are 
found branches of the school, broadly similar but differing in 
details. 

(i) Physiocrats. — The first branch embraces the Physiocrats. 
These are the disciples of Quesnay, physician of Louis XIV, who 
date their existence from 1765. 

The principles of the Physiocrats are the outgrowth of the 
philosophy of the time. Rousseau had inaugurated a new code 
of ethics by the announcement that man, essentially good, has 
but to follow out the tendencies of his nature in order to reach 
perfection. Voltaire (d. 1778) and the Encyclopedists (1751- 

1 " Let make (or do), let pass," that is, Let people work as they like, and let people 
and goods pass freely from one place to another, without government interference. 



THE LIBERAL SCHOOL II 

1780) had propagated their infidel doctrines, by which man 
was exalted and the state belittled — doctrines that were influ- 
ential in bringing about the French Revolution. 

The principles of the Physiocrats more immediately affecting 
economics are as follows : — 

1 . Agriculture alone is the source of the production of wealth. 
(Hence the Physiocrats are sometimes called the Agricultural 

, School.) 

2. Gold is a means of trade, not an end to be sought after. 

3. A nation cannot in the long run sell more than it buys, nor 
would it be benefited if it did. 

4. All government privileges and monopolies relating to 
business and commerce are wrong. 

5. Trade, domestic and foreign, should be entirely free. 

6. Government interference in matters of trade is to be toler- 
ated only when necessary to protect individual liberty. 

7. Taxes should be levied directly on land. 

(2) Adam Smith and his Folloivers. — The second branch of the 
Liberal School was founded in 1776 by Adam Smith, and it em- 
braces many of the French economic writers. Smith differs 
in many points from the Physiocrats. He does not touch on the 
science of Sociology, but limits his discussion to the production 
of wealth. 

Like the Physiocrats, Smith holds that self-interest is the 
fundamental principle which directs men in their economic rela- 
tions. His main principles are as follows : — 
I I. Industry is the source of wealth. (Hence Smith and his 
^ followers are sometimes called the Industrial School.) 

2. Labor is the source of value and the determinant of price. 

3. Trade should be free. 

4. State interference should be reduced to a minimum. 
Malthus and Ricardo are followers of Smith. It was Ricardo 

especially who propagated the doctrines of Smith in England. 

The Liberal School triumphed in England in 1846, when, under 
Richard Cobden and John Bright, with the support of Robert 
Peel, it obtained free trade. 



12 SCHOOLS OF POLITICAL ECONOMY 

(3) French School. — The third branch of the Liberal School 
is the French. Its principal exponents are J. B. Say, Rossi, 
Cherbuliez, Bastiat. They all hold the fundamental " laissez 
faire " doctrine of the school and deprecate state interference. 

(4) Manchester School. — Several other less important branches 
of the Liberal School exist under various denominations ; for 
example, the Manchester School, which, in so far as it touches on 
economic subjects, supports the principles of the Liberal School. 
Since 1820, it has strongly advocated the principle of free trade 
and has been opposed to the principle of protection. This school, 
however, does not confine itself exclusivefy to merely economic 
subjects. It deals in broader matters that come under Political 
Science. 

(5) Moderate Liberal School. — The Moderate Liberal School, 
like its parent, is optimistic and claims that man's nature, if left 
to itself, will dissipate all ills and attain to the perfection that 
lies within the compass of the human race. It advocates, how- 
ever, a partial abandonment of the strict " laissez faire " prin- 
ciples of the older Classical School of Liberals. It permits a 
partial state intervention, and modifies the free trade principle 
so as to tolerate a certain amount of protection where protection 
is the only remedy for certain evils of free trade. It allows a 
broader scope to the study of facts which are admitted to have an 
influence on the trend of economic progress. This branch is 
gradually replacing the old Liberal School. 

(6) Eclectic School. — The Eclectic School, which has arisen 
lately and has for exponents Cauwes and Gide, allows state 
intervention. 

(7) Austrian School. — The Austrian School originated in the 
writings of several Austrian economists, Menger, Wieser, Sax, 
Boehm-Bawerk. It is really a branch of the Liberal School. 
It follows the deductive method of the older school, but differs 
from it in some important conclusions. It lays great stress on 
the marginal theory of value (p. 42). " Utility, the pleasure or 
satisfaction derived from consumption, is the ultimate cause 
and measure of value." (Ely, Outlines of Economics, 1908, p. 



THE SOCIALIST SCHOOL 1 3 

674.) It has been called the psychological school, because it 
seeks the causes of things in the subjective disposition of men. 
It has exerted a certain influence on economic thought. 

(8) Mathematical School. — The Mathematical School, which 
deals largely in statistics, is still another branch. Supply and 
demand, value, wealth, and all the various factors that enter 
into economics, are submitted to statistics, and the law of proba- 
bilities is derived and held to be absolute. This method is 
practiced in France by Cournot, in England by Edgeworth, 
Wicksteed, Walras, Jevons, and Marshall, and in the United 
States by Irving Fisher. 

The Socialist School ; Explanation and Definition. — The 
Socialist School is radically opposed to the Liberal School. 

Society as it exists to-day is not, according to the Socialists, a 
natural product, the effect of the working out of forces intrinsic 
to things, but rather the result of injustice and spoliation. 

They say that the sources of the many e\dls now existing 
in society are individualism, free competition, and the right of 
private property. The principle " everybody for self " works 
to the detriment of all. An individual may begin on an equality 
with his fellows, but soon, through injustice, fraud, a greater 
degree of unscrupulousness, through advantages secured by 
force, chicanery, or conditions wholly social and independent of 
all personal effort, may secure an immense amount of wealth, 
set himself apart from his fellow men, and destroy the equality 
which is the natural right of all. Classes are thus formed, the 
property owner, the wealthy capitalist on the one hand, and 
on the other hand the laborer who owns nothing but his labor 
capacity. 

Under the regime of individualism advocated by the Liberal 
School, there has arisen an ever-widening division between the 
capitalistic and the laboring classes, the rich and the poor. It is 
claimed that the rich are becoming richer and the poor poorer. 
The great army of the unemployed is growing larger. The diffi- 
culty of making a living has gradually increased, though the sum 
of the wealth of the world has been multiplied a hundredfold 



14 SCHOOLS OF POLITICAL ECONOMY 

since the beginning of the great development of industry due to 
the introduction of machinery and the employment of labor- 
saving inventions in industrial processes. 

To bring about amelioration in the condition of the proletariat, 
to do away with the slavery of the wage system, to raise the 
laborer to a plane of freedom and of equality with the en\ded 
capitalist, is the proposed purpose of modern Socialism. 

That there exists a natural tendency towards a change in 
society, towards a communistic ownership of all property, is, 
in the opinion of Socialists, evidenced by the gradual concen- 
tration of all industries, the small or medium industries becom- 
ing absorbed in the giant industrial combinations. It is seen 
also, they declare, in the extensive growth of trusts and great 
corporations that are destroying the individual independent 
artisan class ; in the increasing application of machinery to all 
kinds of labor, whereby the manual worker is driven out of the 
field and made more and more dependent on the capitalists; 
in the rapid spread of municipal ownership of public utilities, — 
all of which are but the forerunners of SociaUsm, the inter- 
mediary steps that will lead ultimately to the introduction of a 
universal commune. 

Socialism is principally an economic system; secondarily 
and subordinately it is a political system, which treats of society 
in general, the state, the family, and other topics of Sociology. 
(Cathrein-Gettelmann, Socialism^ 1904, p. 18.) 

Socialism has made headway in Europe. The Socialists have 
entered into politics, and have been able to form strong political 
parties that seek through legislative means to obtain their aims 
in the several states. In Russia, during the World War, the 
ultra-radicals were successful in overturning the government 
and in setting up a Socialist Republic, in which the principles 
of Socialism were fully carried out. In the United States, the 
SociaHsts have formed political organizations under various 
denominations: Socialist Party, Socialist Labor Party, American 
Labor Party, Communist Labor Party, Industrial Workers of 
the World. A most active propagandism is being carried on by 



THE SOCIALIST SCHOOL 15 

Socialist teachers on the platform and through the press, and 
strenuous efforts are made to bring the mass of the laboring 
classes within the fold of Socialism. 

Socialism or '' social democracy may be defined as that system 
of Political Economy which advocates the inalienable owner- 
ship on the part of the state of all capital or materials of labor, 
as also the public administration of all economic goods and the 
distribution of all produce by the democratic state." (Cathrein- 
Gettelmann, Sociahsm, 1904, p. 17.) 

According to the definition, the state is to become the sole 
possessor of capital, land, mines, factories, raw materials, im- 
plements, and. machinery. It is to become the owner of all 
means of transportation and communication and all other 
public utilities, and to administer all the mechanism of exchange. 
It is to become the distributor of all the produce which results 
from the various factors of production. {lb., p. 92 et al.) 

Principles of Socialism. — The general principles of Socialism 
may be put in more detailed form as follows : — 

1 . The right of individual and private property in the various 
means of production shall cease. To-day, in the progress of 
industrial methods, all the means of production, land, capital, 
machinery, implements, have come into the possession of the 
capitalist. The great mass of the laborers possess nothing but 
their labor, which is useless without the means of production. 
This right of property is the inherent evil of present conditions 
in society and must be done away with before there can be any 
betterment of the working class. 

2. The state shall be constituted in the form of a democracy. 
Any other form of government (monarchy, e.g.) would be in- 
compatible with the perfect leveling of all classes and the con- 
ditions of equality demanded by the principles of Socialism. 

3. The state shall own all capital, land, mines, factories, raw 
materials, implements, machinery ; all means of transporta- 
tion (railroads, express companies, and the like), and of com- 
munication (telegraph, telephone) ; all public utilities (water 
works, gas and electric lighting plants, street railways, and so on). 



1 6 SCHOOLS OF POLITICAL ECONOMY 

4. Production shall be regulated by the state. All the citizens 
shall be obliged to work. (Cathrein-Gettelmann, Socialism, 
p. 201.) They will, however, have arrived through education 
at such a degree of human perfection, that work will be looked 
upon as a pleasure and will be accepted willingly. 

There will be national workshops, and committees will de- 
termine the nature of the work and the amount to be done. 
There will be no overproduction. Just enough will be produced 
to satisfy the needs of the citizens. 

5. The mechanism of exchange shall be regulated and carried 
on by the state. There will be public stores where the products 
of labor may be disposed of by the laborers, in exchange for 
bonds the value of which will be stated in hours of labor. 

6. Labor is the sole standard of value. A commodity has 
exchange value only on account of the human labor expended 
on it, and the measure of labor embodied in the commodity 
determines also its relative value in exchange. {Ih., p. 46.) 

7. There will be no metal money. It shall be replaced by 
labor coupons, which will represent different amounts of labor 
hours, and which can be exchanged by the holders for com- 
modities containing in their production an equal amount of 
hours of labor. 

8. Consumption of goods shall be free with regard to objects 
of ordinary use. Wills shall be allowed only in the matter of 
personal goods. Implements of labor shall return to the state. 

9. The distribution of all the produce of labor shall be in the 
hands of the state. This distribution shall be apportioned 
according to the work done or the services rendered and accord- 
ing to the needs of the individual citizens. (See under Dis- 
tribution, p. 387.) 

(For the origin and growth of Socialism, the fundamental 
principles on which it rests, and its dictates relative to the family, 
education, religion, and other details more particularly pertain- 
ing to social organization, we must refer to the extensive litera- 
ture on Socialism.) 

Defenders of Socialism. — The principal propagators of 



THE SOCIALIST SCHOOL 17 

Socialism are : in Germany — Rodbertus, Ferdinand Lassalle, 
F. Engels, Karl Marx, Bebel, Liebknecht ; in France — Cabet, 
Babeuf, Count Henri de Saint-Simon, Fourier, Proudhon, 
Bazard, Louis Blanc ; in England — Robert Owen, Wm. 
Morris, Wm. Thompson ; , in Belgium — Colins, De Paepe, 
Vandervelde. 

The chief founder of modern Socialism is Karl Marx (181 8- 
1883). In his books Criticism of Political Economy (1859) and 
Capital (1867), he lays down the principles which have become 
the foundation of modern Socialism, and have generally been 
accepted by the great mass of Socialists in all countries. 

Branches of Socialism. — Besides the Socialist School just 
described, there are several other branches of Socialists or near- 
Socialists, who adopt principles differing materially from those 
of the Marxian Socialists. 

(i) Agrarian Socialists. — Agrarian Socialists, followers of 
Henry George (d. 1897), hold: — 

1. That all the land should belong to the community. The 
government should receive the economic rent from land. 

2. That tax on land should replace all other taxes. This is 
the doctrine of the " single tax." All other government taxes, 
with all their attendant evils, multiplicity, cost of collection, 
inequality, and injustice, would be abolished. Henry George 
protests that the " single tax " is not a tax on land, but on the 
value of land. All lands may be conceived as having a funda- 
mental value. An added accidental value may accrue to 
certain parcels of land, owing to various causes over which the 
landowner has no control. Such causes are increase of popu- 
lation, of exchanges, scientific discoveries and inventions, social 
education, the general advancement of society. These causes 
bring about an '' unearned increment " in the value of land. 
This " unearned increment " should be the property of society, 
since it is wholly the result of social conditions. The means by 
which to effect this state appropriation of the " unearned in- 
crement,^' and indeed of all '' rent," is taxation. {Progress and 
Poverty, Bk. VIII, ch. 2.) 

POL. ECON, — 2 



1 8 SCHOOLS OF POLITICAL ECONOMY 

3. That the owner of land should be entitled only to what- 
ever his labor and capital can produce from the land. 

The principles advocated by George would lead to SociaUsm 
pure and simple. They postulate the cessation of the private 
right of property in land. According to this school, individual 
property right in land is an injustice. Land must become na- 
tionahzed. " This is the remedy for the unjust and unequal 
distribution of wealth . . . and for all the evils which flow from 
it: we must make land common property." {Progress and 
Poverty, Bk. VI, ch. 2.) 

Labor, according to George, is the only legitimate title to 
private property. {lb., Bk. VII, ch. i.) 

Rent, to which, as will be seen later (p. 394), the landowner 
has a just right, w^ould be confiscated without compensation 
by the state. '' Rent is a robbery." " Rent, the creation of 
the whole community, necessarily belongs to the whole com- 
munity." {Ih. Bk. VII, ch. 3 ; Bk. VIII, ch. 2. Cf. H. Pesch, 
S.J., Lehrbuch der Nationalokonomie, I, p. 189.) 

(2) State Socialists. — '' State Socialism," says M. de Mun, 
" is a social conception in which the state, the central power, 
possesses and administers directly all the great financial and 
industrial enterprises of the country, directs all its social in- 
stitutions, becomes the holder of all the resources of the nation, 
and in turn itself provides for all the moral and material needs 
of the citizens, becoming thus the universal treasurer and banker, 
the general agent of transportation and commerce, the exclusive 
distributor of labor, of wealth, of means of education, of employ- 
ments and of aid, — in a word, the promoter and the regulator 
of all natural activity." (In Antoine, Cours d'economie sociale, 
p. 216.) 

State Socialists believe indeed in private property, but with 
them the right of private property is a creation of the state, not 
a natural right. What the state has given the state can take 
away. The capitalist owner is but a public steward and may 
be removed at the will of the state. 

The defenders of State Socialism would take a course midway 



THE SOCIALIST SCHOOL 19 

between Socialism and Individualism. They hold that the state 
is able by its laws to bring adequate relief to all the evil con- 
ditions that exist in society. They would leave out religion 
from every effort to alleviate the sufferings of the masses. 

State Socialism errs in denying the natural right of private 
property, and in claiming that it is but a concession of the state. 
*' The individual and the family with their essential rights are 
older than the state, and among these rights is that of private 
property." (Cathrein, Kirchen Lexicon, " Sociale Frage," p. 
442.) 

It errs, moreover, in believing that the state alone can cure 
the ills of society. It can do much, but its efforts will prove 
abortive unless it has the concurrent aid of the Church in 
instilling the principles of Religion into the minds of men. 

(3) Evangelical Socialists. — The Evangelical or Christian 
Socialists would seek the reform of society through the spread 
of the Gospel and the influence of Christian teaching. They 
would engage the cooperation of all religions. 

(4) Anarchists. — Anarchism, like Socialism, seeks the aboli- 
tion of the present order of things. It would replace the exist- 
ing social system by absolute liberty and equality. When all 
authority and class distinctions and property rights have been 
destroyed, they maintain, men will live together in peaceful 
amity and perfect accord. (Cf . Cathrein- Gettelmann, Socialism, 
p. 14.) 

The principal exponents of Anarchism are Bakunin (d. 1876), 
Prince Krapotkin, Eliseus Reclus, John Most, John Mackay. 

The professed ultimate object of Anarchism is the well-being 
of all, perfect equality, the reign of pure reason and liberty. 

The immediate objects are the destruction of individual 
property rights, the spoliation of capitalists, the burning of all 
title deeds, the abolition of authority, the replacing of actual 
society by a federation of groups. 

The means advocated by the more radical anarchists are 
dynamite, the dagger, the bomb. 

(5) Syndicalists. — Syndicalism, especially of the radical type, 



20 SCHOOLS OF POLITICAL ECONOMY 

seeks the destruction of all present forms of government and 
social organizations, the abolition of private property, and the 
dominance of the working classes over all the other classes of 
society. It proposes to accomplish its end by the formation of 
closed unions of the different trades, and the employment of the 
strike and of violence against the ruling orders, thus precipitating 
a social revolution, out of which will emerge a social condition 
in which men will live associated in small federated groups. 

(6) Bolshevists. — Bolshevism stands for the overthrow of 
existing forms of government, the elimination of the upper 
classes, and the establishment of the supreme rule of the working 
classes. Private property is abolished. Land and all productive 
agencies are nationalized. The people are divided into com- 
munistic groups or Soviets. The soviet through its elected officers 
rules in its district. National government is administered by a 
congress of all the Soviets, and a Central Executive Committee. 
The principles and the actual operations of the Bolshevists can 
be studied in the Russian Socialist Federated Soviet Republic 
which began in 19 18. 

(7) Industrial Workers of the World. — The aim of this organ- 
ization is to unite all the laboring class into an industrial union 
that will replace the present system. "One big union" is to be 
formed, and when solidly established, a universal strike is to 
disrupt society and bring it under the control of the workers. 

The Catholic School ; Representatives. — The representatives 
of the Catholic School and the exponents of its doctrines are to 
be found in every country of the world. Prominent members 
of the Catholic hierarchy in every land have by word and act 
sought to stem the tide of irreligion and materialism that sweeps * 
over the world and tends to pervert the principles of action in 
economic and social matters. In many European countries Catho- 
lics have formed political parties that seek by their influence in 
legislative assemblies to safeguard the fundamental principles. 

In the United States, conditions are not the same as in Euro- 
pean countries. Here religious toleration exists and practical 
equality obtains among all denominations. Hence there have 



THE CATHOLIC SCHOOL 21 

not been the incentives to induce Catholics to unite in any 
specially concerted action. Still the influence of Catholic teach- 
ing is spread in the pulpit through the preaching of the Catholic 
hierarchy and priesthood, in the press through the many Catholic 
magazines and newspapers, in society in general through the 
increase of Catholic societies. 

The Catholic School has grown considerably during the past 
fifty years, especially in Europe. The movement was started 
in Germany by Bishop von Ketteler, of Mainz, through his 
many waitings, and especially his book Die Arbeiterfrage unddas 
Christenthum (1864). In France the most ardent propagator of 
the ochool is Count de Mun, whose writings and speeches have 
done much to spread the movement. The Encyclical Rerum 
Novarum, of Leo XIII, since its publication in 1891, has be- 
come the main source of the principles of the Catholic School. 

Position of the Catholic SchooL — The Catholic School deals 
broadly with the whole social question, and does not limit its 
investigation to merely economic subjects. The latter are so 
intimately interwoven with the general principles of the school, 
that it is almost impossible to confine one's self strictly to purely 
economic matters without entering in some detail into a review 
of the broader subject of social science as understood in the 
Catholic policy. We may be pardoned, therefore, for the detail 
with which the subject is treated. 

Cause of Social Evils. — The evil under which society is at 
present suffering is a religious and a moral evil. 

The source of the social unrest is not to be found in the actual 

/condition of the laboring class as compared with past times. 

The general condition of the working class is better to-day than 

it has ever been in previous times, a fact admitted by many 

economic writers and substantiated by statistics. 

A cause of discjuiet does lie in the fact that in recent times the 
development of distribution has not kept pace with production. 
Production has increased immensely owing to the introduction 
of machinery and the application of modern methods in all in- 
dustrial concerns. The capitalist is enabled to reap immense 



22 SCHOOLS OF POLITICAL ECONOMY 

returns, while the wage earner has not been proportionately 
bettered by the advance of capitalistic production. The in- 
dividual is driven out by the gigantic corporations that seek to 
absorb all smaller independent businesses. He cannot compete 
with the opulent trusts and combinations and is forced to accept 
and conform to the prices set by them, with the almost certain 
result that he will be obUged to close his business. 

Machine work has in many industries taken the place of 
manual work; the machine drives out the smaller artisan, and 
the latter is forced to give up his freedom and independence 
and to depend for his subsistence on the wage offered by the 
capitalist. 

The laborer received a lesser wage in former times, but he 
was sure of his wage. In more recent times, the laborer is not 
always certain of his living. He cannot count on the certainty 
of his weekly wage. Overproduction will cause his hours of 
work and remuneration to be curtailed ; the invention of a new 
machine may throw him out of work ; he may have to change his 
domicile to seek work in more favorable localities. 

Such are some of the reasons for the unrest existing to-day 
in society. They are economic reasons. But there are also 
reasons of a spiritual nature. 

Selfishness has developed greatly among the members of 
society. The doctrines of the Liberal School, the principles 
of individualism and free untrammeled competition, have for 
long held implicit sway in the world, and the result has been 
to generate a struggle for existence in which each one seeks his 
own welfare at the expense of his neighbor if necessary, or at 
least with a total disregard for the interests of others, and looks 
with displeasure upon conditions that enable others to surpass 
him. 

To this may be added the desire to rise above a condition of 
ease and comfort, and the ambition to acquire wealth, in order 
to share in the life of luxury of which so many examples are 
given by the very wealthy. 

These are some of the causes which arouse a spirit of unrest 



THE CATHOLIC SCHOOL 23 

among the laboring classes, and bring about antagonism between 
the capitalists and the proletariat. 

Liberal School Rejected. — The Catholic School holds that the 
solution of the social question cannot be found by following 
out the principles of the schools already mentioned, the Liberal 
and the Socialist schools. 

It rejects the " laissez faire " principle of the Liberal School, 
and insists that to the state belongs the duty of procuring the 
temporal well-being of society. The Liberal School errs in 
insisting almost exclusively on the rights of the individual. 
Man is also a social being, and his social relations must form 
part of the concern of the state. 

The free and unrestrained competition so strongly advocated 
by the Liberal School has introduced many evils into society. 
Large industries are able to destroy the smaller through the 
competitive power they have resulting from their possession 
of immense capital. Through competition capital has become 
the master in the world of production, and society has become 
divided into two antagonistic classes, the wealthy capitalists 
and the poor wage earners. To prevent the abuses resulting 
from unrestricted competition, the state should exercise its 
power through wise regulation and supervision. The freedom 
of the weaker elements of society should be safeguarded against 
the rapacity and the unjust measures of the stronger. 

Socialism Rejected. — The Catholic School rejects Socialism, 
because : — 

1. Socialism falsely bases its system on the equality of rights 
of all men, and is Utopian in aiming at a condition of perfect 
equality and fraternity. Men are not equal in the concrete, 
in physical and mental endowments, in the possession of qualities 
that make for success in the competitive struggle for existence. 
Human nature will never become the ideally perfect thing the 
Socialists conceive. (See under Distribution, p. 385.) 

2. Socialism would subject the laborer to greater slavery than 
Socialists claim now to exist, since he will depend for his labor 
and place of work on the will of the community. 



24 SCHOOLS OF POLITICAL ECONOMY 

3. Socialism would do away with the rights of the individual 
and make him merely a unit in the great social fabric. 

4. It rejects the natural right of private property in the means 
of production. 

5. It falsely claims that labor alone is the source of all value. 
(See under Value, p. 40.) 

6. It falsely holds the theory of the Iron Law of wages. 
(See under Wages, p. 451.) 

7. It unduly exaggerates the importance of industrial life 
or the production of wealth. (Cf . Cathrein-Gettelmann, Social- 
ism, p. 201.) 

8. It is hostile to religion. 

9. It destroys the sanctity and the indissolubility of marriage, 
and would efface the family. 

Principles of the Catholic School. — The fundamental prin- 
ciples of the Catholic School may be outlined as follows (cf. 
Cathrein, Kirchen Lexicon, " Sociale Frage," p. 445) : — 

Human society is ordained by God. The Church, the state, 
and the family are institutions divinely ordained, each with its 
own particular aim and sphere of activity, each with its own 
peculiar rights and duties, each with its relations to the others, 
and all destined to work unitedly and harmoniously towards a 
common purpose. All these institutions tend to help man to at- 
tain his end, and that end is to serve God in this life and thereby 
reach eternal happiness in the next. This earth is not man's 
lasting dwelling place. It is but a place of trial and pilgrimage, 
where sorrow always will abide and the heart of man can never 
attain perfect happiness. 

While every effort should be made to better social conditions, 
society in its existing form should not be overturned, and strenu- 
ous warfare should be carried on against the Socialist doctrine 
that would subvert the present order of society. 

Insistence is laid on the following points : — 

1. The sacredness and indissolubility of marriage. 

2. The right of the parents to educate the child. 

3. The right of private property in the means of production, 



THE CATHOLIC SCHOOi. 25 

without excluding the right of property in the state or cor- 
porations. 

4. The right of private individual productive energy and 
enterprise, contrary to the claim of Socialists and State So- 
cialists, who would give such right to the state alone. The 
individual and the family are older than the state. 

5. The right of individuals to unite for the safeguarding of 
their liberty and their rights. 

6. The toleration of the differences of classes in society, 
though the bitter opposition existing at present between them 
should be reprobated. Not absolute equality of all classes is 
sought, but a condition wherein there should exist respect and 
charity among all the members of the different classes. The 
perfect equahty desired by the Socialists is in opposition to 
human nature, to Christian revelation, and to the real welfare 
of society. 

Nor is the democratic state advocated by Socialists to be 
sought for; whatever form of government obtains rightfully 
in the state, be it monarchy or democracy, is to be accepted. 

7. Rejection of the " laissez faire " principle of the Liberal 
School. By legislative and executive means, the state must 
seek to remedy the evils of society. " The state is established 
to provide for the well-being of society, and society is formed 
in great measure of the working class. To this class, therefore, 
the state must direct its most vigilant solicitude under pain of 
neglecting its duty. It is said that the duty of the state is to 
cause justice to be observed ; but that is not all its duty ; it 
must, moreover, in order to fulfill all its obligations, seek out 
the social welfare, which does not depend exclusively on justice, 
but also on a mass of other elements, the most of them depend- 
ing on labor. Consequently, it must intervene in the protection 
of labor, so as to enable labor to participate in public prosperity 
and safety." {Civilta Cattolica; in Antoine, Coiirs d^economie 
sociale, p. 236.) 

Liberatore says : "A certain amount of state intervention 
in the economic affairs of society is indispensable. Leaving them 



26 SCHOOLS OF POLITICAL ECONOMY 

at the mercy of selfishness in conflict is applying to industry 
the Darwinian idea of the struggle for existence, in which the 
strongest has the best of it by survival of the fittest. The duty 
of the government in this matter is to protect the weak and 
direct the strong." {Political Economy, p. 273.) 

8. But the state cannot do all. The Church must join with 
the state. The moral evils that burden society can be overcome 
only through the influence of Christianity, and this influence 
will be exerted through the divinely appointed institution — 
the Church. 

9. Activity on the part of laborers and small tradesmen 
for their own preservation and betterment. They must become 
active. Church and state can do little without this autonomic 
cooperation of the people themselves. 

Trade unions and labor unions should be formed for the 
protection of the smaller traders and the wage earners. 

Such are the broad principles of the Catholic School. They 
may all be embraced under the three heads: (i) State legis- 
lation, wise, moderate, and progressive; (2) The action and 
influence of the Church and Christian charity; (3) Individual 
and associated initiative. 

Activity of the State. — The activity of the state should be 
exerted in obtaining the following reforms : — 

I. The safeguarding of the family and the preservation of 
the home life of the laborers. A man has a right to an orderly. 
Christian family life. At present such a life is scarcely possible 
to the average wage earner. Unlimited competition leads to 
an effort after production at the cheapest possible cost. Hence, 
the labor of women and children is employed, to the detriment 
of the home life. Wives and mothers who are forced to spend 
the day in factory work in order to add to the scant wages earned 
by the head of the family, are prevented from making the home 
attractive. They are obliged to give over the care of young 
children to the charity of neighbors or of nurseries ; they can 
exert no beneficent influence on the early education of their 
children, while the children who go out to work are deprived of 



THE CATHOLIC SCHOOl. 27 

any but the merest rudiments of education, and are exposed to 
all the evils, physical and moral, of factory life. 

2. Decent and sanitary conditions in the dwellings of the 
working class. 

3. Prohibition of night work except when necessary. 

4. Prohibition of labor on Sunday. 

5. The encouragement of union between capital and labor. 

6. Restriction in the formation of trusts. 

7. Laws favoring labor unions, unions between capitalists 
and workmen, employment bureaus. 

8. The establishment of a minimum wage suitable for the 
sustenance of an honest and diligent workman, and the fixing 
of the normal fee in each profession. 

9. The fixing of the extreme greatest limit of a day's work 
for all laborers, and especially for the work of children under 
18 years of age. 

10. Prohibition of the labor of women in mines, and of the 
night work done by women and by children under 18 years of 
age. 

11. Prohibition of child labor in factories for children under 
14 years of age. 

12. Enforcement of sanitary conditions in the workshops. 

13. The greatest possible elimination of danger from ma- 
chinery, by causing all machinery to be guarded against the 
carelessness of employees. 

14. Insurance of the laborer against the loss of life, accident, 
sickness, forced unemployment. 

Activity of the Church. — The activity of the Church is shown 
by teaching the truths of Christianity to all classes. The state 
can affect only the external conditions of men. There must 
be an inner change, a change in the mental conception of the 
fundamental truths on which social life is based, and which 
should determine the actions of men in their relations to God, 
to themselves, and to their neighbors. This can be done by the 
Church alone, and it can be done only by the spread of the truths 
of the Gospel. 



28 SCHOOLS OF POLITICAL ECONOMY 

Hence the Church must have perfect freedom to carry out its 
task of instructing the people. 

Through the teaching of the Church, men will learn to lift 
their gaze to a higher life and to reahze that their whole life 
purpose should not be limited to the acquisition of wealth, that 
there are loftier aims of a spiritual nature more befitting the 
activity of their spiritual faculties. 

Men will conceive the right idea of this present life as a time 
of trial, where happiness here and hereafter can be attained by 
serving God and obeying His law. 

The rich and the poor will be brought to realize that they are 
not opponents, but are united by a common bond, having the 
same Creator and the same end, with mutual rights and duties. 

The laborers should put aside all envy of the rich and should 
fulfill their contracts with the rich and bear with patience and 
resignation the hardships of their life. Poverty and manual 
labor are not degrading, since the Son of God became poor and 
earned His livelihood through the work of His hands. 

On the other hand, the rich should look upon the laborer not 
as a mere tool whose labor they may bargain for, but as a fellow 
being endowed with a personality and possessed of inalienable 
rights. They should pay the laborer a just wage, should not 
overburden him with work, nor expose him to danger of life and 
Hmb, but should treat him with respect and kindness, since he 
too is a child of God and an heir to Heaven. 

The Church teaches not only the duties of justice, but insists 
on the practice of charity. All men are members of the same 
God's family. The rich are the custodians, the stewards of the 
wealth they possess. It should in some way be shared with the. 
poor. They can give of their superabundance. The greater the 
need of the poor, the greater the duty of the rich. 

The Church is not merely a teacher. It is moreover the dis- 
penser of God's grace through the sacraments. Herein it offers 
to men a powerful means of strength to aid the weakness of 
human nature in tending towards the lofty ideals which it lays 
before them in its teaching. 



THE HISTORICAL SCHOOi. 



29 



The Historical School ; Explanation. — The Historical School 
of Political Economy is a reaction against the Classical School, 
and began with the publication of Wm. Roscher's work on Po- 
Utical Economy in 1843 {Grmtdriss zu Vorlesungen ilber die 
Staatswirtschaft nach geschichtlicher Methode). With Roscher 
should be associated Lorenz von Stein, Bruno Hildebrand, Karl 
Knies, Kauts, Cliff e-Leslie, De Laveleye. 

The Historical School rejects the deductive, aprioristic method 
of the Liberal School, and turns to history for the study of so- 
cial and economic facts. 

Instead of assuming principles arrived at through the deduc- 
tive method and insisting that facts must necessarily conform to 
such principles, the school studies economic facts in their relation 
to their surroundings and as influenced by the conditions of gov- 
ernments, laws, external and internal forces, as manifested in the 
past history of peoples. 

The Historical School holds that there are no universal and 
absolute principles, no general body of laws, which determine 
the mode of action of the various economic events. Each par- 
ticular circumstance of time must be studied, they say, and the 
trend of events will indicate a certain conclusion which, however, 
is not a law in the strict sense, but an historical declaration of 
how things happen. Things do not happen by any logical 
sequence, but because of circumstances peculiar to each case, 
changeable as the circumstances may change. 

According to the Historical School, there is a continual evolu- 
tion going on in economic matters as there is in all society. The 
direction which the evolutionary process will take depends on 
environment, internal and external, w^hich imperceptibly exerts 
its influence on men and things. 

The Historical School follov/s the general tendency of scientific 
investigation in the preceding century, in decrying the meta- 
physical methods of argumentation and turning more to the ob- 
servation of concrete facts. Its method is purely descriptive and 
tends to destroy Political Economy as a science. 

Principles of the Historical School. — Its principles, more 



30 SCHOOLS OF POLITICAL ECONOMY 

particularly relating to Political Economy, may be thus formu- 
lated : — 

1. Greater insistence should be put on the study of historical 
facts relative to wealth, its production, consumption, and dis- 
tribution, than upon the abstractions, hypotheses, and a priori 
deductions so much used by the Liberal School. 

2. These historical facts present merely passing phases of 
an ever advancing and ever changing development. 

3. The so-called laws of Political Economy are but the gen- 
eralizations of facts as noticed in the past, and furnish no cer- 
tainty of what will take place in the present or the future. 

4. Property ownership and wages are not the outgrowth of 
any general or necessary causes, but " historical categories," ^s 
they are called. 

5. The principle of " laissez faire " should be rejected. 

6. The state must aid in bringing about economic prosperity 
by wise laws. 

QUESTIONS 

1. What forms the basis of the definition of Political Economy? Why is 

the activity of man brought into the definition ? 

2. What is a science? Show that Political Economy comes within the 

definition of a science. 

3. Illustrate by concrete examples how Political Economy makes use of 

observation. What does Political Economy observe ? 

4. What is the nature of the experimenting made use of by Political 

Economy ? 

5. What is a law ? What kinds of laws does Political Economy formulate ? 

Does Political Economy accept any laws from any other source? 
Give concrete examples of the several kinds of laws that are found 
in Political Economy. 

6. What is a practical science ? a speculative science ? Give examples of 

each kind. Why is Political Economy a practical science ? 

7. What is Ethics ? Show how Political Economy is distinct from Ethics 

but subject to it. Give examples to illustrate. Does popular 

opinion to-day admit a connection between Ethics and Political 
Economy ? 

8. What is Political Science? Give examples to show that Political 

Economy is subordinate to Political Science. 



QUESTIONS 31 

9. What is induction? deduction? Explain the method of Political 
Economy. Give examples. Show how the sources of ethical prin- 
ciples are made use of in the discussion of some economic subject. 

10. Explain the Mercantile System. 

11. What are the fundamental principles of the Liberal School? Does the 

Liberal School favor the deductive or the inductive method in arriving 
at its conclusions ? Explain the meaning of these terms by examples. 

12. Mention the different branches of the Liberal School. Read up the 

historical account of the adoption of free trade in England in 1846. 

13. Give a general view of the Socialist School. WTiat fundamental prin- 

ciple of the Natural Law does Socialism reject? 

14. Give a brief account of the Catholic School — its defenders, its view 

of social evils, its main principles, the activity of Church and state. 
Why did the Catholic School spring up in Europe ? 

15. How does the Historical School differ from the Liberal School? 



CHAPTER II 

THE STUDY OF ECONOMICS. WEALTH. VALUE, 

PRICE 

I. The Study of Economics 

Divisions of Political Economy. — With regard to the method 
of studying Political Economy, the science is divided into three 
parts: the Historical, the Theoretical, and the Practical. 

The Historical part of Political Economy is the narrative of 
the progress of a nation and of the causes affecting Political 
Economy, as commercial geography, the establishment of the 
consular service in the various cities and towns of foreign coun- 
tries, the origin of protection or free trade in a country, the 
reports of the government on various subjects, the development 
of banking, the trend of immigration, export and import duties, 
cost of living in the past and the present. 

Theoretical Political Economy studies the principles affecting 
the science ; tells what is wealth, value, price ; the factors affect- 
ing exchange, distribution, consumption, production. 

The Practical part of Political Economy takes up the different 
problems of Economics, the actual applications of the theories 
seen in the second part, and studies such questions as taxation, 
free trade and protection, banking, insurance, corporations, the 
labor»problem. 

These three parts are not usually divided and studied sepa- 
rately except in some of the larger universities. They are ordi- 
narily combined as here in the general course. Recent writers 
on Political Economy give much space to the Historical part. 

In our study of Political Economy, we shall consider Produc- 
tion, Exchange, Consumption, and Distribution. 

32 



DEFINITION AND EXPLANATION OF WEALTH 33 

Before entering upon the subject of Production, we must take 
up the questions of Wealth, Value, Price. 

II. Wealth 

Definition of Wealth. — First, then, what is wealth? (Cf. 
E. B. Andrews, Institutes of Economics, p. i.) In ordinary lan- 
guage, a man is said to be wealthy when he possesses a sufficient 
quantity of the goods of this world to place him not only beyond 
the reach of necessity and want, but within the possibility of 
satisfying all his tastes and desires. Such a man is a man of 
wealth. This is the popular notion of wealth. 

Wealth, in the economic sense, has a different meaning. 
Economic wealth consists of those things capable of satisfying 
the wants of men, procured by labor, and exchangeable. 

The things to which reference is made when speaking of 
wealth may be of two kinds : things material and things imma- 
terial. Material things are all the various objects that exist 
outside of man, are corporeal, and capable of transference 
from one person to another. Immaterial things are found 
in man himself, cannot be transferred to another, and consist of 
physical properties, as health ; or mental or moral qualities, as 
knowledge, skill, business instinct, honesty, or docility. 

Wealth, as defined, may be public or private. Public wealth 
is that which belongs to a whole community constituted as town, 
city, state, or nation. Private wealth is that which belongs to 
individuals or individual corporations. 

The definition of economic wealth needs some explanation. 

Wants. — What is meant by wants of men ? All men have 
wants. These wants it is difficult to classify, but in general 
the fundamental wants of man may be said to embrace the fol- 
lowing things: Food, Lodging, and Clothing. 

Food, lodging, and clothing may be just sufficient to keep a 
person ahve and protected in his life, or they may rise in varying 
degree beyond the absolutely necessary and thus constitute the 
comforts required by a customary and decent Hving. Hence 

POL. ECON. — 7. 



34 



WEALTH 



the wants of men are classified as forming the Necessaries, the 
Comforts or Decencies, and the Luxuries of life. (Andrews, 
Institutes of Economics, p. 104.) 

Wants grow with civilization. Men have many more wants 
to-day than in past ages. '' Education, the taste for the beau- 
tiful, the need of social intercourse or of traveling from place 
to place, the desire for always knowing the latest news, or for 
amusement, nay, for fighting, which is more fashionable than 
ever — all these call into existence a number of important articles 
of wealth in the shape of libraries, telegraphs and telephones, 
carriages, tramways, omnibuses, newspapers, theatres, pictures, 
music, cannon, and ironclads." (Gide, Principles of Political 
Economy, 1900 edit., p. 37.) 

The nature of these wants need not be considered. They may 
be as irrational and as frivolous as you please ; still they are 
wants and as such enter into the subject of wealth. If any one 
were to pass through a large department store in one of our great 
cities, he would be at his wits' end to find a reason for a want for 
a quarter of the things he sees there. Necessity is the origin 
of many of the wants of men, but whim and fashion are often the 
sole reasons for many of them. 

Objects Capable of Satisfying Wants. — Now, the goods which 
constitute wealth must be capable of satisfying a want. Thus, a 
coat, a hat, an automobile, a diamond, satisfy certain wants of 
man. Men want Peruvian bark, sassafras, roses, lilies, and some 
hundreds of other members of the vegetable kingdom, because 
these satisfy their wants, but there are thousands of plants 
which they do not want, because as yet science has not revealed 
the manner in which they can be made useful. 

The fact that things can satisfy a want of man and thus become 
the objects of desire on his part must enter into the adequate 
concept of wealth. Things that have no relation to man's 
wants cannot be called wealth. Things which once were wealth 
but which have ceased to be wanted by man cease to be wealth. 
Were a man to gather a vast quantity of some commodity which 
was absolutely incapable of satisfying any possible want of man, 



DEFINITION AND EXPLANATION OF WEALTH 35 

he could not be said to have wealth. If he could by any 
means create a desire on the part of men for the commodity 
he has gathered, he would thereupon become the possessor of 
wealth. 

Objects Procured by Labor. — Moreover, the object which 
thus satisfies some want must entail in its procuring some 
exertion of man's activity. It must be procured by labor. 
There are many objects which satisfy man's wants, but which are 
procured without labor ; for example, air, water, sunshine. 
Nature bountifully bestows them upon all men. They do not, 
therefore, usually enter into the classification of wealth. 

It may be, however, that such natural gifts as air, water, 
sunshine, will, under certain circumstances, be brought within the 
classification of things procured by labor. Thus, air may be 
wealth when pumped into a coal mine ; water, when furnished 
to the inhabitants of an arid region or a crowded city ; sunshine, 
when reflected into a sunless room for photographic or other 
chemical purposes. 

Objects Exchangeable. — Again, the objects capable of satis- 
fying wants and procured by labor must be exchangeable or 
transferable. There are many things possessed of the first 
two qualities which lack the third. Thus, a man's reputation, 
his health, his credit, his business sagacity, his privileges as a 
citizen, are personal to the man himself and cannot in them- 
selves be exchanged for other things. 

Even material things will not be wealth, if their acquisition is 
so beyond the power of man that they cannot be made transfer- 
able. An object may in the abstract be capable of satisfying 
wants, but if it cannot by any possibility either now or in the 
future be such as actually to satisfy those wants by being ex- 
changed, it is as if it did not exist at all. So, if a man possessed a 
storehouse full of objects which could not at any time be ex- 
changed for other objects, he would not have wealth. 

It must be noted, however, that this portion of the definition 
of wealth has more particularly reference to private wealth, for 
when there is question of the public wealth of a nation, certain 



7,6 WEALTH 

things constitute wealth which cannot be transferred or ex- 
changed. Such, for example, are sewers, harbors, bridges. 

Immaterial Goods as Wealth. — Whether immaterial goods, 
such as business talent, skill, knowledge, should be included in 
the computation of wealth, is a matter upon which all economists 
are not in agreement. Some, like Laughlin, calculate only- 
material things ; others, hke Andrews, include immaterial things. 
Still others include immaterial things but classify them as " serv- 
ices." 

Wealth may be considered under two aspects : as individual 
wealth, and as national wealth. 

To classify immaterial things among an individual's wealth, 
and to say, for instance, that such a man, though he possess not 
a cent's worth of material things, is wealthy, because he has good 
talents, great knowledge of history, philosophy, etc., would, 
according to common parlance, take words out of their literal 
meaning and give them merely a metaphorical sense. But in 
speaking of a nation's wealth the fact that one nation has more 
skilled workmen than another in actual employment will make 
an evident factor in calculating its wealth. The possession by 
a nation of a greater amount of technical knowledge, of a 
higher degree of education, of a loftier morality in the matter 
of honesty and justice, will conduce to an increase of the 
material wealth of the nation. We cannot omit taldng account 
of such immaterial things in computing national wealth, or in 
making a comparison between the productive capacities of 
different nations. They are, to say the least, conditions, the 
presence or the absence of which will exert an undoubted 
influence on the production of wealth. 

Money as Wealth. — The question may be asked : Is money 
wealth ? Money may be considered in two ways : either as a 
material object containing a certain quantity of substances, 
gold, silver, copper, nickel, paper, which can have exchange 
value, or as an instrument stamped and issued by the government 
and legalized as a medium of exchange. 

In the former view, money is wealth, just as any other similar 



DEFINITION OF VALUE 37 

commercial article is wealth. In the second view, it is not 
wealth ; it is a medium of exchange. It can procure commodi- 
ties which will constitute wealth. It is an " order " for goods 
which is operative as long as the convention of people lasts or 
the credit of the government which issues it is unimpaired. 

It will be interesting and instructive to endeavor to point 
out which of the things in the following list should be accounted 
as wealth: air, sunshine, water, corn, wheat, grass, piano, hat, 
coat, shoes, privilege of citizenship, buildings, machinery, im- 
plements, work horse, race horse, government bonds, railroad 
stocks, mortgages, right of way, property in slaves, good will in 
a business, debts, personal qualities, business instinct and sa- 
gacity, health. 

III. Value 

Value in General. — We now come to the question of value. 
It is declared to be one of the most diihcult questions within 
the domain of economics, and it is one about which there is the 
greatest divergence of opinion. 

Let us first consider value in general. A wise statesman is 
of great value to his country ; prudence is a vrtue of great 
value ; a diamond is an object of value. In each of these we 
observe an objective reality, an inherent goodness, a degree of 
utility for a certain purpose : the wise statesman for the pro- 
tection and guidance of his country ; prudence for the direction 
of man's conduct ; the diamond for adornment. Here is 
something objective and internal contained within the things 
themselves. 

But this is not sufficient. In order that objects may have 
value, there must exist a perception of their inherent and objec- 
tive qualities by intelligences outside the objects. 

Men, considering the objects, must perceive their use and 
their capacity to serve in some way towards man's preservation 
or perfection. When such is the case, there arises in men an es- 
teem for the objects, because of the objective goodness or utility 
perceived, and a desire on their part to possess the objects. 



38 VALUE 

This esteem of men for the objects and their consequent desire 
for the objects constitute the subjective part of value. 

Value, therefore, is at once objective and subjective. Value 
arises not merely from the desire men have for an object. If it 
did so arise, value would be merely subjective. It arises also from 
the intrinsic goodness, absolute or relative, which is in the object. 

Value in general, then, may be defined to be the desirability of 
an object on account of its absolute or relative goodness. 

The definition of economic value may be derived from this 
general definition. 

Economic Value. — The objects which enter into economics 
and to which may be attributed economic value, are all the vari- 
ous objects which constitute wealth. The intrinsic goodness 
which these objects have from the economic point of view is their 
economic utility, i.e. their capacity to satisfy a want, their pro- 
duction by labor, and their exchangeability. Herein consists 
the objective element of economic value. The subjective ele- 
ment is the desirability of this economic utility. The desira- 
bility arises when men perceive the utility of the object and as a 
consequence esteem the object. 

Hence, economic value may be defined as the desirability of 
the economic utility of an object. 

Economic value, then, arises from two elements : an intrinsic 
element which is found in the object of value, and an extrinsic or 
relational element which consists in the estimation of the object 
by intelligent beings. 

Value in Use ; Value in Exchange. — Value is divided by some 
writers into Value in use and Value in exchange. 

Value in use refers to the use an object is put to, the service it 
renders, the want it satisfies. Value in exchange refers to the 
worth of an object relative to other objects with which it can be 
compared and for which it can be exchanged. 

Many economists reject this division of value in use and value 
in exchange. According to these writers, value in exchange is 
the only kind of value with which Political Economy has to deal. 
Value in use of an object, they say, might better be called the 



CAUSE OF VALUE 



39 



utility of that object. Economic value implies comparison with 
other things. It is a relative term. Value is '' the power of a 
commodity to command other commodities in exchange." 
(Bullock, Introduction to the Study of Economics, p. 184 ; cf. J. 
Stuart Mill, Political Economy, I, p. 421 ; cf. also Ely, Seligman, 
Fetter, Gide, Davenport, Cairnes, Walker, Jevons.) 

When the term " value " is used in the following pages, ex- 
change value is meant. 

Cause of Value. — What is the cause of value? Why is it 
that one thing has more value than another? A diamond, a 
watch, a coat, a barrel of flour, a pair of shoes, a loaf of bread, a 
pencil, a pin, have different values. How account for the differ- 
ence of values ? 

The proximate cause of the value of a thing is the desire men 
have for that thing ; the remote causes are its utility to satisfy 
a want, its scarcity, and its difficulty of production. 

The wants of men may be natural or artificial, and man desires 
the various objects which satisfy his natural and his artificial 
wants, and thus these objects become of value. Thus, corn, coal, 
iron, are objects that satisfy man's natural wants, and man de- 
sires them and they have value. Gold, diamonds, laces, pianos, 
satisfy man's artificial wants, and man desires them and they 
have value. Thus, things have value because they are useful. 
Utility, therefore, is a primary cause of value. 

If utility alone were the cause of value, the value of things 
should vary with the utility and be dependent on the nature of 
the utiUty. The intrinsic utility of a thing that satisfies a nat- 
ural w^ant is greater than the intrinsic utility of a thing that 
satisfies an artificial want, and the things that have greater in- 
trinsic utility should have a higher value than others that pos- 
sess less intrinsic utility. Such, however, as we know by expe- 
rience, is not the case. The value of many things useful to 
satisfy artificial wants is greater than the value of things useful 
to satisfy natural wants. A diamond, a small quantity of gold, 
a piece of old lace, a piano, have much higher value than a ton 
of coal, a bushel of corn, a pound of iron. 



40 VALUE 

Utility alone, then, does not explain the relative disparity that 
exists in the value of things. We must seek an additional cause. 

This cause is the limitation of quantity or the scarcity of the 
objects. The more scarce a thing is, the more keen will be the 
desire of men for that thing. If diamonds were as plentiful as 
coals, diamonds would be as cheap as coals. They would not 
have the value they have to-day. Paintings of a certain kind 
are comparatively cheap and may be secured without much out- 
lay. But the paintings of an ancient master may demand a 
fabulous sum, because of their scarcity. Scarcity, then, must 
be added to utility. 

Furthermore, this scarcity or limitation of quantity will de- 
pend on the power men have of multiplying the objects in ques- 
tion. When shoes were made by hand, the scarcity of shoes was, 
relatively great, because only a limited number of shoes could 
be manufactured in a given time ; but when machinery was in- 
troduced that could turn out a great quantity of shoes in a day, 
the scarcity of shoes decreased, and the value of shoes decreased 
in proportion. 

To conclude, then, the cause of value is the desire men have for 
things useful to satisfy their wants. This desire depends on 
the scarcity of things, and the scarcity depends on the power to 
multiply the things more or less easily. 

Various Theories of Value. — The theories of value advanced 
by various economists may be summed up under the following 
heads : Utility, Scarcity, Diihculty of attainment, Labor. It 
would only lead to confusion to attempt to explain and refute 
all these several theories. 

It may be worth while, however, to notice the theory that 
declares Labor to be the cause of value. 

Labor as a Cause of Value. — It is the theory advanced by 
Adam Smith and Ricardo and, with some modifications, by 
Bastiat and Carey. It is especially the theory of the Socialist 
School, and because of the importance attributed to it by 
Socialists, it is advisable to consider the grounds of the assertion. 

Marx, the practical founder of modern " scientific " Socialism, 



LABOR AS A CAUSE OF VALUE 4 1 

distinguishes between value in use and value in exchange. 
Value in use is the utility of an object to satisfy human wants ; 
value in exchange is the ratio of exchangeability of an object for 
other objects. 

The two values, value in use and value in exchange, says Marx, 
have no connection between them; they are wholly distinct. 
Value in exchange does not depend on value in use. Value in 
exchange of an object depends on the amount of human labor 
put into it. Objects differ in exchange value because they have 
entailed in their production a greater or a less amount of labor. 
It is labor alone which gives them their exchange value, and not 
their utility to satisfy wants, not the estimation men have of them 
as things useful and desirable. A ton of coal, for example, has 
required a certain amount of labor to produce it. The exchang-e 
value of the ton of coal will be equal to every other commodity 
or sum of commodities which have required the same amount 
of labor. If the labor expended on the production of the ton of 
coal has taken five hours, and the labor expended on the produc- 
tion of a dozen pairs of shoes has taken five hours, the values of 
the ton of coal and of the dozen pairs of shoes are equal. 

Marx's theory of value cannot be accepted. It is not true to 
say that the value of a thing depends solely on the labor put into 
it. A person may labor for days in the manufacture of an ar- 
ticle — it may not therefore acquire value. If men do not 
desire the article, it will remain unexchangeable and of no value. 
And men will desire it only in so far as it has the property of be- 
ing able to satisfy a want, in so far as it is useful. 

A thing does not become more desirable or more useful because 
of the greater amount of labor that has been required to produce 
it. There is something behind the labor, which makes the object 
desirable, and which is the cause of the labor which has produced 
it; namely, its utility in relation to some want of man. 

Moreover, as a matter of fact, objects produced with the same 
amount of labor have different values under different conditions. 
Such conditions will be the greater or less demand there is for 
the objects, and this demand again will depend on the greater 



42 



VALUE 



or less degree of utility perceived by men in the objects. Hence 
labor cannot be the sole cause of the value of such objects. 

'' Although the labor theory of value is still held by many fol- 
lowers of Marx, its place in the creed of scientific socialism is 
diminishing in importance." (Ely, Outlines of Economics, 1908,. 
p. 184.) 

Marginal Value. — As mentioned in a preceding page, the Aus- 
trian School attempts to explain value from a psychological and 
subjective point of view. 

Value, they say, will depend on the estimation men have of the 
utility of a commodity. The commodity can be divided or con- 
ceived to be divided into small portions, the several portions 
serving to satisfy some want of man. 

• The want may be conceived to be divided into small portions 
or into degrees which range from absolute or relative necessity 
to a wholly dispensable want. 

One portion of the commodity will satisfy an absolutely or 
relatively necessary portion or degree of the want, and other 
portions of the commodity will satisfy other portions or degrees 
of want, the portions and degrees of want gradually diminishing 
until the want reaches a stage where it almost ceases to be a want. 

Each portion of the commodity will have a value dependent 
on the degree of want it satisfies. That portion of the com- 
modity which satisfies an absolutely necessary want will have 
an infinite value. The last portion of the commodity which 
satisfies a want of the lowest degree, and which is on the margin 
where the want ceases to be a want, will have a very small value. 

Now it is this last want, the* marginal want, which determines 
the value of the commodity in the market. This constitutes 
the marginal value. Thus all commodities will have a marginal 
utility and a marginal value. 

The marginal utility will differ for each individual, depending 
on many circumstances, but primarily on the amount of the 
commodity possessed by the individual. Thus, an acre of land 
is valued less by a man who has one thousand acres than it would 
be if he had only ten acres. A dollar is valued more by the 



MARGINAL VALUE 



43 



possessor of five hundred dollars than by the possessor of one 
million dollars. Marginal value of an object diminishes inversely 
with the supply one has of the object. This supposes that a 
man remains unchanged in his disposition with regard to the 
acquisition of things, and if this supposition is granted, the 
proposition as stated is called by Marshall the Law of the 
Diminution of Marginal Utility. 

Yet there will be an average degree of utility for the great ma- 
jority of all the individuals, and this average marginal utility 
will determine the average marginal value, which will be the 
actual value of the commodity. 

For illustration, take wheat, of which a man has a certain 
quantity. What would be the value of a bushel of wheat, if he 
were to exchange ? 

The wheat may be divided into portions. One portion is 
needed by the owner for the making of bread for his actual 
sustenance. This portion will have an infinite value to him and 
he would not sell it for any price. 

A second portion is needed for seed for the coming crop. This 
portion is of less actual utility than the former and will have less 
value. 

A third portion is needed for the feeding of his stock. This is 
less needed than the other two, and has still less value. 

A fourth portion is needed for the making of pastry. This 
portion may more easily be dispensed wdth and is of less value 
than the first three. 

Now if the man wanted to exchange any portion of his wheat, 
he would exchange the last portion, which is of least utility to 
him and would have least value. The actual value of the wheat 
is estimated not by the sum total of the values of all the por- 
tions, but by the least useful portion or the marginal utility of 
the whole. 

Another, who wishes to exchange boards for this man's wheat, 
will likewise offer that portion of his commodity which is the 
least useful to him, which has a marginal utility, and will have a 
marginal value. 



44 PRICE 

If the exchange between the two is not demanded by any great 
necessity, the exchange value will be fixed at a certain level, 
which will be midway between the value that would be fixed 
by higher degrees of want and by no want at all. When many 
exchangers are in similar conditions, the exchange level of wheat 
and of boards will become the general relative exchange value of 
wheat and boards. 

The theory of marginal value has been widely propagated in 
recent times and has gained acceptance among many economists. 

It is objected to, because all things are not capable of such 
minute division as the theory supposes, and, as a matter of fact, 
people do not actually enter into any such classification of util- 
ities and wants, nor do they analyze the value of a thing, dis- 
tinguishing between total value and marginal value. 

Moreover, men are not stable in their desires, there is no long 
permanency in their disposition to acquire things, nor does the 
acquisition of things satiate the appetite. As a result, marginal 
utility cannot be a general determinant of values. (Cf. Devas, 
Political Economy, p. 196 ; Antoine, Cours d^economie sociale, 
p. 274.) 

IV. Price 

Definition and Explanation of Price. — Price is the value of 
an object expressed in money. Value is not the same as price. 
Value expresses a relation of an object with other objects for 
which it can be exchanged. It depends, as we have seen, on 
its two principal elements, — utility and limitation of quantity. 
1 If the utility of an object is increased, its value increases ; if 
the quantity is increased, the value of a given amount of it 
decreases. 

But price is a relation of the value of an object to money., 
This relation we might express in any other material, as corn ; in 
rice, as did the Japanese ; in cotton stuffs, as did the African 
negro ; in fox or otter skins, as did the Canadian trapper ; or 
again in labor, as the Socialists would have it ; but the civilized 
world has adopted the precious metals coined as money. 



SCHOLASTIC DOCTRINE OF PRICE 45 

Money has become the measure of value. The value of all 
things is read in terms of money, and in estimating the relative 
values of different things, the things are not compared one with 
another, as was done in barter, but with the common standard, 
money, and thus their relative values become known. 

The price of any object should bear some relation to the 
value of the object. By value here is meant exchange value 
or economic value, as explained in a preceding page. 

The economic value is caused by three factors, — the utiHty 
of the object to satisfy a want, the scarcity of the object, and the 
difficulty of attainment or of production. The price of an 
object, therefore, will bear relation to the same factors. 

It wdll depend, in practically equivalent terms, on demand, 
supply, and cost of production, — the utility of the object being 
the measure of the demand for it ; the scarcity of it indicating 
the relative supply; and the difficulty of production depending 
on the cost to the producer in placing the object on the market. 

Price will depend, moreover, on the rate of return for invested 
capital prevalent in the country or locality of which there is 
question. Producers will expect a return for their capital equal 
to the current rate of return for capital in general. In some 
countries and at some periods the average general return for 
capital inv^ested may be comparatively small ; in other countries 
and at other periods the average general return will be com- 
paratively great. The prevailing rate of profit will exert an 
influence on the prices of commodities. 

Price will depend, again, as we shall see later, in treating of 
money and prices, on the amount of money in circulation. 

Scholastic Doctrine of Price. — According to Scholastic 
writers, there is what is called a just price, a price founded on 
justice. It demands that the price should maintain a proportion 
of equality between the object purchased and the sum paid for 
it, and hence that the price should be a sum of money equal to 
the value of the object. 

This price is Legal, when determined by legal statute. During 
the Middle Ages, while the guilds were in existence, the prices 



46 PRICE 

of most of the articles of commerce were fixed by law. To-day 
the law determines the charges for certain services, as cab serv- 
ice in certain cities, and railroad transportation. 

The price is a Natural or Common price, when it is fixed by the 
common estimation of men. This common price will depend on 
the utility and the general cost of production of the object itself, 
as well as on various social circumstances, such as the abundance 
or scarcity of the object and of money, the different customs of 
life in different places, supply and demand, the expense and risk 
of transporting and marketing the object. 

The common price is not a fixed and definite figure. It allows 
a certain amount of latitude. Hence, there is the highest, the 
lowest, and the average just price. The highest and the lowest 
limits are figures above and below which the article is not sold. 
The price may vary within these limits according to the greater 
or less intensity of the determining circumstances already men- 
tioned. 

At times, an object may have a specially high price beyond the 
limit of the highest price fixed by the common estimation of 
men, owing to the appreciation of the object by the owner, be- 
cause of its peculiar utility to him and the special degree of pri- 
vation he will suffer upon parting with the object. The exces- 
sive price he asks for the object would not in such a case violate 
justice. 

The owner of an object would violate justice, however, were 
he to charge an exorbitant price, because of the special utility 
or necessity an object might have exclusively for the proposed 
purchaser ; in such a case the owner would be endeavoring to 
make a profit out of a utility not his own but pertaining to 
another. 

From this account of the Scholastic theory of price, it will be 
seen that most of the fundamental principles set forth to-day 
by modern economists were known years ago to Catholic writers. 

The Liberal School claims that there is no such thing as a 
" just price," or rather that any price is just which results from 
economic principles or forces, such as supply and demand. 



MARKET PRICE 47 

Buyer and seller are allowed to determine what sum of money 
shall exchange for any commodity or service, and the agreement 
between the buyer and the seller makes the price just, whatever 
be the circumstances under which the agreement is effected. 

Market Price. — Market price is the price any commodity haa 
in its market at a specified time. Thus, we may turn to the 
market list and find the market price of corn, of wheat, of sugar, 
of salt. 

" A market exists when purchasers and sellers of a single com- 
modity come together in such freedom of intercourse that they 
establish a single price at which the commodity exchanges." 
(Bullock, Introduction to the Study of Economics, p. 184.) 

Each commodity will have a separate market, and we can 
speak of the steel market, the iron market, the wheat market. 

There are wholesale markets and retail markets. Wholesale 
markets may be very large, embracing a whole country, and even 
be international. The prices will tend to be uniform through- 
out the whole market. Thus, wheat in the United States and 
Europe. The wholesale dealers compete in distant markets. 

Retail markets are restricted to a single locality, to a street 
even, and prices will be different in each locality, even in each 
store. The retail dealers do not compete usually in distant mar- 
kets. 

The market price fluctuates up and down according to cer- 
tain laws which we shall study presently, but there is a certain 
fixed price about which these fluctuations turn. This fixed price 
is called the Normal price. 

Certain objects have their own special markets, in which 
dealers appear through their brokers and buy and sell and de- 
termine the prices of the objects. Such special markets are 
known as Exchanges. 

Exchanges. — Among the principal exchanges may be counted 
the London Stock Exchange (established in 1773), which deals 
in all kinds of commodities, stocks, bonds, and bills ; the New 
York Stock Exchange (established in 181 7) and the Paris Bourse 
(established in 1726), which deal chiefly in public and corporate 



48 PRICE 

stocks and bonds; the Consolidated Stock Exchange of New 
York, which deals chiefly in stocks. New York has also a Prod- 
uce Exchange (established in 1862), dealing in agricultural 
products ; a Cotton Exchange, for cotton ; a Maritime Ex- 
change; a Metal Exchange; and several others. 

These exchanges have become a necessity in modern business. 
The New York Stock Exchange, after its organization in 181 7, 
dealt at first in bank, canal, and industrial stocks. Later it 
took up railroad stocks and bonds, and more recently it has 
become a market for the stocks and bonds of industrial concerns. 
Government bonds, and the stocks and bonds of railroads and 
industrial corporations, now form the principal objects of trad- 
ing in the New York Stock Exchange. Since the invention of 
the telegraph and the laying of the transatlantic cable, the 
New York Stock Exchange has become a world market sur- 
passed only by the London Stock Exchange. 

The enormous scope of the business of the Exchange may be 
realized when it is known that the shares sold there have reached 
in some years 200,000,000 in numbers, with a value of over 
twenty billions of dollars. {Financial Review, 19 12, p. 45.) 

The New York Stock Exchange has iioo members. These 
members alone have the right to enter on the floor of the Ex- 
change and to engage there in buying and selling transactions. 

In order that stocks and bonds may be bought and sold on the 
floor of the New York Exchange; they must first be registered on 
the Stock List of the Exchange. The Exchange does not guar- 
antee the value of the securities traded in, and cannot be held 
responsible for losses incurred in the selling or buying of stocks. 
Certain precautions, however, are taken before any security 
is admitted. Before a security can be fisted, it must be re- 
ported favorably by the Stock List Committee and the Gov- 
erning Committee. A statement is required of the organiza- 
tion, receipts, expenditures, and earnings of the company, in 
a word, of its general financial standing. Some corpora- 
tions do not desire to have their financial condition known, and 
will not submit to the requirements necessary for listing. There 



MARKET PRICE 49 

is demand, however, for the securities of such corporations, and 
as they are not admitted in the New York Stock Exchange, they 
must be traded in on the Curb, or in some other exchange — 
the Consohdated Stock Exchange of New York or the exchanges 
of other cities. The Hsted securities are accepted by the banks 
as good collateral for loans. 

The transactions of the stock market may be carried on for 
investment purposes or for speculation purposes. In the former 
case, securities are actually bought and paid for in full and are 
turned over by the seller to the buyer, who keeps them for the 
income they yield. In the second case, shares are traded in for 
profit through the rise or fall of the value of the shares. Large 
buying orders will sometimes help to raise the price of the 
shares, which are then sold at the higher prices, thus securing a 
profit for the dealer. Or, again, shares not owned by the seller 
are sold with the intention of buying back later at a lower price 
and making a profit by the difference in the selling and the 
buying prices. In the regular exchanges no fictitious purchases 
or sales are permitted. Hence traders must be ready for the 
delivery of the security or commodity involved. 

A " bucket-shop " is an organization engaged in the business 
of dealing in the differences of the prices of securities and com- 
modities as quoted in the exchanges, without any intention of 
actually buying or selling. 

Speculation in stocks may again be carried on by the system 
known as trading on margin. The customer deposits with his 
broker in cash a certain per cent, usually lo per cent, of the price 
of the stock. The broker buys or sells the stock, as explained 
above, and when the transaction is closed by a corresponding 
sale or purchase, the customer is charged with the loss or 
credited with the gain, after paying the broker's commission 
and interest. 

A great amount of trading, reaching into the millions of 
dollars, is done outside the regular stock market in what is known 
as the '' Curb Market." The system is found in connection 
with large exchanges, in London, Paris, and New York. In 

POL. ECON. — 4 



50 PRICE 

New York, curb trading, until 1922, was effected on the street 
outside the Stock Exchange. The securities usually traded in on 
the "curb" are securities that for various reasons have not been 
registered on the official Stock List of the Exchange. Some of the 
Standard Oil Company's securities are among those traded in 
on the curb. Trading on the curb is frequently done in securi- 
ties of newly organized corporations which have not yet reached 
a position to be listed in the regular .exchange. The prices of 
the shares of such corporations become fixed even before they 
have been actually issued. The disciplinary code that obtains 
in the curb market is established by custom and the consent of 
those engaged in the business. 

The exchanges possess undoubted advantages. They afford 
a ready means of trading in securities and commodities. They 
furnish exact lists of the prices of objects and the momentary 
changes to which the prices may be subject owing to influences 
operating in any part of the world. Investors are safeguarded 
against fraud on the part of brokers, whose standing in the ex- 
changes depends on their honesty and business integrity. The 
publicity given by means of the daily price quotations and the 
nature of the fluctuations in the prices of the shares make known 
to investors the condition of the corporation in which they con- 
template investing. The flow of capital is directed along chan- 
nels where the greatest productivity will result. 

The prices of bonds and stocks dealt in in the Stock Exchange 
or of commodities traded in in other exchanges are determined 
by the demand and supply of these objects as expressed by the 
bidding of the brokers who are acting for outside investors. 
The prices will therefore, ordinarily, indicate the actual value 
of the properties, the securities of which are on the market, or 
of the commodities traded in. It may happen, however, that 
speculators may " corner " the market. A " corner " in the 
market is effected when a person or a syndicate buys up the 
whole of any stock or the whole supply of any commodity, in 
order to secure a monopoly and force others to buy at a monopoly 
price. Or, again, stocks may be manipulated by intriguing 



VARIATIONS OF PRICES 5 1 

persons who have personal designs upon different corporations, 
or by speculators who are seeking a profit through a rise or fall 
of prices. Owing to manipulation of this kind, there will be at 
times a great difference between the real values of the securities 
or the commodities and the prices at which they are quoted in 
the exchanges. On May 9, 1901, the shares of the Northern 
Pacific railroad, which never before had reached $100 a share, 
were forced to the price of $1000 a share, through the efforts of 
rival groups of capitalists to secure the property. (Cf. G. S. 
Pratt, The Work of Wall Street.) 

Variations of Prices. — Objects have at different times a 
higher or a lower money value or price. The articles of general 
consumption on the market will require more money for their 
purchase at one time than at another. A ten-dollar bill will not 
buy as much at one time as at another. The purchasing power 
of money will not be the same at all times. In other words, 
prices rise and fall at different periods. 

We speak here not of the prices of individual objects, but of 
general prices. Thus, it is a fact that between 1850 and 1873 
general prices rose throughout the world, and after 1873 general 
prices have fluctuated, at times rising, at other times falling. 
During the past fifteen or twenty years, prices have risen con- 
siderably. 

System of Index Numbers. — The fact of a general rise or low- 
ering of prices may be ascertained by the use of a system known 
as the System of Index Numbers. One hundred commodities 
are selected and their prices found at some given time. The 
sum of all the prices of these commodities is computed, and this 
sum will be the index number for that time. At the end of ten 
years, the prices of the same commodities are again computed? 
and the sum of these prices will give the second index number. 
These two index numbers are compared, and prices will be 
said to have risen or fallen, according as the second index is 
greater or less than the former. 

Our present purpose is to seek out some laws for the variations 
of prices. 



52 PRICE 

Kinds of Variations. — Variations in price may be classed 
under two heads : — 

1. Those variations in the market price which cover a long 
period of time and are very marked, the normal price increasing 
or decreasing considerably. 

2. Those variations which occur from day to day and are 
never very great. They may be called oscillations. 

To illustrate: In 1850, less than one hundred dollars w^ould 
buy a house lot in the upper portion of New York City ; to-day, 
one hundred thousand dollars would not buy the same lot. In 
1^73? 371 4 grains of silver, the amount contained in a silver 
dollar, cost $1.02; in 1893, the same amount of silver cost 
somewhere near 50 or 60 cents. These are some of the great 
variations that extend over great lengths of time. The minor 
variations, the oscillations in prices, may be seen in the morning 
papers for the various commodities sold in the markets. 

Laws of Variations in Price. — The laws regulating the first 
kind of variations are as follows : — 

1. Other things being equal, money value or price increases 
and decreases directly with the utility of the commodities. 

This may be seen in the case of land. A lot in the center of a 
block is not so useful for commercial purposes as a corner lot, 
and the corner lot wdll be more valuable. A farm situated on the 
southern side of a hill will be more useful for the growing of 
grapevines than one situated on the northern side of the hill, 
and hence will be more valuable. Again, the utility of silver as 
money has diminished, — through the introduction of the various 
instruments of credit, checks, notes, bills of exchange, — and 
so the value of silver has diminished. 

2. Other things being equal, money value or price increases 
and decreases inversely with the quantity of the commodities. 

Thus, since the introduction of machinery in certain lines of 
industry, the quantity of articles produced has increased, with a 
consequent decrease in value. Again, through the occupation of 
land for farming purposes, the quantity of game has decreased 
and the value of game has increased. 



VARIATIONS OF PRICES 53 

We come now to the smaller oscillations of prices. The gen- 
eral law affecting these variations is the law of supply and de- 
mand : the price of any commodity depends on the quantity 
offered by the sellers and the quantity demanded by the buyers. 
The relation may be thus briefly stated : — 

When demand is equal to supply .... Price is normal. 
When demand is greater than supply . . . Price rises. 
When supply is greater than demand . . . Price falls. 

When the supply of an object is such that there is sufficient 
to satisfy the current demand for it, the market will be peaceful 
and the price of the object will be normal or closely correspond- 
ing to the objective value of the object. If, for any reason, 
there should be created an increased demand for the object, 
while no change has taken place in the supply, the market will 
become more active. Those who now want the object, which, 
because of the relative scarcity of it, has become more difficult 
to get, will endeavor to obtain it by offering more money for it, 
with the result that the price of the object will rise. 

In like manner, if the supply should increase, while the demand 
remains unchanged, the difficulty of obtaining the object will 
have diminished, and the sellers of the object will, in order to 
dispose of it, be content to receive less for it than would be the 
normal price. Thus, the prices will fall. 

The Liberal School insists much on this law and would seem 
to give to it a sort of infallible efficiency, as if it were the unique 
factor in determining the variations of prices. Yet the law is 
not so absolute that it can be expressed with mathematical pre- 
cision. 

Those err, therefore, who state the law in the following precise 
mathematical form : " Value varies in direct ratio of the quanti- 
ties demanded, and in inverse ratio of the quantities offered." 
This means that if the demand is doubled, the supply remaining 
the same, the price is doubled ; and, if the supply is doubled, 
the demand remaining the same, the price is reduced one half. 

The law is not a rigid law that will always produce its effect. 



54 PRICE 

Many causes may enter to prevent its operation. Among other 
things, the price itself will act on supply and demand with the 
result that the price will tend to become normal. The following 
table will explain the way in which the strict law would be carried 
out: — 



A. 


Demand, 


lo, 


II, 


12, 


13, 


14, 


15, 


16, 


17, 


18, 


19, 


20 




Supply, 


lo, 


lO, 


10, 


10, 


10, 


10, 


10, 


10, 


10, 


10, 


10 




Price, 


$I.OO, 


I.IO, 


1.20, 


1-30, 


1.40, 


I-50, 


1.60, 


1.70, 


1.80, 


1.90, 


$2.00 


B. 


Supply, 


lO, 


II, 


12, 


13, 


14, 


15, 


16, 


17, 


18, 


19, 


2C 




Demand, 


lO, 


lO, 


10, 


10, 


10, 


10, 


10, 


10, 


10, 


10, 


10 




Price, 


$I.OO, 


.91, 


.84, 


•77, 


.72, 


.67, 


•63, 


•59, 


•56, 


.53, 


$•50 



In example ^ , let 10 in the first line be a figure representing the 
demand. It may be ten buyers, or ten hundred, or ten thousand. 
It increases through the intermediate stages — 11, 12, 13, etc. — 
to 20. In the second line, let 10 represent the supply, which re- 
mains unchanged. In the third line, $1.00 represents the normal 
price of the commodity. 

It is claimed that, the supply remaining the same, if the de- 
mand is doubled from 10 to 20, the price should also be doubled 
from $1.00 to $2.00. But notice how the price will affect 
the demand in this transaction. 

The demand increases from 10 to 11, and the price increases 
from $1.00 to $1.10. The demand increases to 12, and the price 
increases to $1.20. But when the buyers observe that the price 
is $1.20, they will begin to reflect and will cease to desire the com- 
modity, and there will be a decrease in the number of buyers, so 
that the demand will fall below 12. 

Again, notice the effect of the price upon the supply. The 
suppliers of the commodity, noticing the increase of price from 
$1 .00 to $1 . 10, and to $1 . 20, will hasten to increase the supply, and 
thus equilibrium will be effected between supply and demand and 
the price will return to the normal, $1.00. 

In example B, the figure 10 in the first line will represent the 
supply, which goes on increasing through 11, 12, 13, etc., to 20, 
where it is doubled. In the second line 10 represents the de- 



VARIATIONS OF PRICES 55 

mand, which in this case is supposed to remain fixed. In 
the third Hne, $1.00 represents the normal price, which, 
according to the law, should become one half as the supply is 
doubled. 

Consider now the effect of the price on supply. As the sup- 
ply increases from 10 to 11, 12, 13, etc., the sellers or suppliers 
notice the decline of price, and, as rational business men, will 
decrease instead of increasing the supply. They will work their 
factories on half time. They will turn their capital into other 
channels. 

On the other hand, as the buyers notice the fall of price, they 
will grow more numerous, and the demand instead of remaining 
stationary mil increase. Thus the equilibrium between sup- 
ply and demand \\dll be established and the price will return to 
the norm.al. 

The equilibrium between supply and demand in both cases 
will usually be brought about long before the supply or demand 
can have doubled. It will at times take but a slight variation 
in price to bring it about. The law, therefore, is not to be 
taken as an absolute mathematical formula. Still it has great 
significance because it embraces in a short form a very wide- 
spread and far-reaching principle. 

The principle of supply and demand cannot be accepted as 
the absolute and universal principle it is claimed to be by the 
Liberal School. With regard to many things it is impossible to 
know either of the factors, the amount of the supply or the sum 
of the demand, and yet, before an absolute law can be formulated, 
its elements should be known. 

Account must be taken of the attitude of men's minds and of 
their desires with regard to different objects. Some things men 
cannot do without, and they will be willing to offer any sum for 
what they deem to be a necessity. In the wheat market, a fall- 
ing off by a small fraction of the usual amount produced may 
cause the price of wheat to double, after a manner wholly out of 
accord with the law as stated above. Other products that do not 
enter into the class of necessities may diminish greatly in output 



56 PRICE 

without any corresponding increase of price, because men will 
more easily endure deprivation of such objects. 

Again, should an object become the fashion, the price will 
continue to rise in spite of the immense supply that may be put 
on the market. When the fad has ceased, the price falls sharply. 

Fluctuations in market prices and the frequency of such fluc- 
tuations will depend in great measure on the nature of the objects. 
Thus, as Devas puts it {Political Economy, 1910 edit., p. 235), 
fluctuations in prices will be greater, — 

(i) the more necessary the goods are to life ; 

(2) the more insignificant the goods are in the total expenses 
of the purchasers ; 

(3) the more perishable the goods are ; 

(4) the more expensive the goods are to keep ; 

(5) the more untransportable the goods are ; 

(6) the more uncertain the number of customers for the goods ; 

(7) the more the production of the goods is liable to misad- 
venture ; 

(8) the more fixed and specialized the capital used in the pro- 
duction of the goods ; 

(9) the longer time that must elapse before there can be any 
serious increase in the supply of the goods ; 

(10) the less the possibility of using any substitute for the 
goods. When no substitute is possible, the commodity will be all 
the more subject to the law of supply and demand. These fac- 
tors may vary considerably and thus affect the price of the com- 
modity. When a substitute is possible, there will be a hindrance 
put upon the operation of the law, and the variation of the price 
will not be so great. 

Prices and Competition. — Competition exists when one is at 
liberty to take what action is most advantageous to himself in 
regard to his employment and the disposal of his goods. 

Competition has a great influence on prices. When prosper- 
ity exists in a country and there is abundance of money, the de- 
mand for commodities is increased. The immediate effect of 
the increased demand, before any special efforts can be made by 



PRICES AND COMPETITION 57 

the producers to increase the supply of commodities, will be a rise 
in the prices. 

But the producers, finding the markets profitable, will endeavor 
to supply the demand in the several markets. They will in- 
crease their plants in order to produce more commodities. They 
will put into their industries all the capital they can possibly 
spare, and they will borrow capital from loan institutions, offer- 
ing every kind of acceptable security for the payment of the loans. 
Competition will be rife on their part to add to the supply and to 
sell their goods while the markets continue profitable. 

The awakened activity in the various industries will produce 
an increase in the supply of commodities. The result will be a 
fall in the prices of commodities. 

Again, the profitable nature of the several industries will ap- 
peal to all who have capital to invest. Promoters will become 
active in securing capital with which to enter the field. This will 
again add to the supply and hasten the fall in prices. 

Finally, the producers are all striving to increase their trade, 
and the most effective means of doing so is to offer their commodi- 
ties at lower prices'. The prices will reach that stage where the 
producers will receive but small profits ; in other words, they 
will fall to within near reach of the cost of production. Where 
absolute competition exists, there will always be many producers 
who will be content with small profits, i.e. who will bring the 
prices down near the production cost, and it is these producers 
who will determine the prices of the commodities. 

But the costs of production will be affected by the competitive 
activity of the producers in their endeavor to supply a profitable 
market. The increased activity will cause a greater demand for 
raw material. It will cause a greater demand for capital. It 
will cause a greater demand for labor. The increased demand for 
these factors will bring about a rise in the price of raw material, 
in the price of money or interest, in the price of labor or wages. 
These factors constitute in great measure the costs of production. 

The costs of production increasing, they will eat into the profits 
of the producers, and the prices of the commodities will have 



58 PRICE 

to be raised by the producers in order to cover the increased 
costs and to make even moderate profits. 

There will always be an interval more or less lengthy between 
the first moment of the high prices of commodities and the 
second moment when the costs of production — the prices of 
raw material, money, and labor — will level up to the prices of 
the commodities, and during that interval great profits will be 
made, and the industries will be exceedingly advantageous to 
the producers. 

The effects of competition may be expressed in the form of 
laws as follows : — 

1. Competition tends to equalize the prices of all similar 
products. 

Suppose corn sells for 50 cents a bushel, the normal price. If 
a seller offers corn at 48 cents, all the buyers will at once outbid 
one another so that the demand will raise the price. If a buyer 
offers 52 cents for corn, all the sellers will underbid him and one 
another until the price falls to the normal. 

2. Competition tends to reduce the price of all products to a 
minimum level determined by the cost of production. 

By cost of production is meant the amount of capital consumed 
in order to produce a commodity. The wealth produced must 
be greater than the wealth consumed ; otherwise the business 
would not pay and no one would engage in it. 

This may be illustrated by the following example. 

A capitalist puts into the shoe business $85,000. The expenses 
of the business in one year are distributed as follows : — 

Services $ 7, 500 

Wages 36,000 

Materials 97,000 

Rent 1,000 

Taxes 250 

Machinery and Repairs 3,000 

Other expenses 5,250 

$150,000 

He turns out 75,000 pairs of shoes in a year. The 75,000 pairs 
of shoes have cost him $150,000, or one pair of shoes has cost him 



PRICES AND COMPETITION 59 

$2.00. He must sell his shoes for $2.00, in order to cover his ex- 
penses. But he wants a profit on his invested capital. It is 
to his interest to make the profit as large as possible, and to sell 
his product at the highest possible price. He may fix the price 
at $2.10 or $2.25 per pair. 

But here competition sets in. There will be many producers 
of shoes who will be content with small profits and will charge 
but little above the cost of production, and they will determine 
the market value of the product. Each producer will strive 
to increase his own trade, and he will do so principally by offer- 
ing his product at a lower price than his fellow-producers. 
Naturally he will not sell at or below the cost of production, 
since he desires a profit. The result will be that the general 
cost of the pair of shoes will be a minimum consistent with a low 
rate of profit. 

Table 

Capital invested $85,000 

Pairs shoes produced in year 75, 000 

Price of shoes per pair = expenses $2.00 

= expenses + 5 % profit on capital ... 2.06 
= expenses + 10% profit on capital . . . 2.12 
= expenses + 20% profit on capital . . . 2.23 
Competition price = $2.06. * 

This matter is clear enough when there is question of different 
products. Each separate product will have its price deter- 
mined by the cost of production. But it constantly occurs that 
there come to one and the same market different portions of the 
same commodity, each of which has had a different cost of 
production. 

Thus, in the New York market, there will be coal from Penn- 
sylvania and from West Virginia, corn from New York State 
and from Ohio, lumber from the east and from the west. It 
must be evident, merely because of the freightage, that the cost 
of production of the different portions of these commodities 
will be greater in some cases than in others. And yet there is 



6o PRICE 

but one price for the whole class of articles, whatever may have 
been the cost of production of each individual portion. 

How is the market price determined? 

Here is corn piled in this elevator. One bushel cost in pre ► 
ducing and in placing on the market 69 cents ; another bushel 
cost 64 cents ; a third cost 59 cents. Will the market price be 
regulated by the maximum cost, 69 cents, or by the minimum 
cost, 59 cents, or will it be the average, 64 cents ? 

A distinction must be made. The commodities of which there 
is question may be such that they cannot be multiplied at will, 
or they may be such that they can be multiplied at will. 

Thus cotton, live stock, the cereals, corn, wheat, oats, cannot 
be multiplied at will ; the quantity that can be raised on a 
given area of land is limited. But shoes, nails, spades, ham- 
mers, and other such things can be multiplied at will. 

Now with regard to the former class of commodities, viz. 
those which cannot be multiplied at will, the normal market 
price will be regulated by the maximum cost of production. 
And the reason is this : — 

If the producers of this class of commodities foresaw that they 
could not get a price sufficient to cover their expenses, they 
would not produce the commodities, and there would be a 
deficit in the supply, with a resultant rise in the price. 

Nor would it be to the interest of those producers who can 
produce at less cost to undersell those who produce at greater 
cost, because they profit all the more by the high prices, and 
their own production being limited, they could sell no greater 
quantity if they should undersell their competitors. 



200,000 bushels 



Table 

A. WTieat. A, B, C, D produce at cost of $.69 . , 

E, F, G, H produce at cost of .64 ... 200,000 bushels 
J, K, L, M produce at cost of .59 . . . 100,000 bushels 

Demand and supply 500,000 bushels 

Price of the wheat $.69 

A, B, C, D will not produce unless they get $.69. If they fail to pro- 
duce, there will be but 300,000 bu., where 500,000 are in demand. The 



MONOPOLY PRICE 6 1 

supply decreasing, the price will rise. It will rise suificiently to make it 
possible for A, B, C, D to produce, viz. to $.69. E, F, G, H, and J, K, L, M 
cannot produce any more than 200,000 and 100,000 bu., respectively, since 
the commodity, wheat, cannot be multiplied at will. 

With regard to the second class of commodities, those, namely, 
which can be multiplied at will, the normal market price will 
be determined by the minimum cost of production. • 

From comparison with the other case, the reason is plain. 
Those who can produce at less cost may undersell those who 
produce at greater cost, and as the commodities can be multi- 
plied at will, the supply will not decrease and the prices will 
not rise. The only result will be that those who cannot profit- 
ably continue production at the low market price will retire 
from that kind of business. 



200,000 hammers 
200,000 hammers 
100,000 hammers 
500,000 hammers 
$.59 



Table 

B. Hammers. A, B, C, D produce at cost of $.69 

E, F, G, H produce at cost of .64 

J, K, L, M produce at cost of .59 

Demand and supply 

Price of a hammer 

Here, J, K, L, M can sell their hammers for $.59, and the 500,000 de- 
manders will come to them for hammers rather than to A, B, C, D, or 
E, F, G, H whose prices are higher. J, K, L, M will increase their actual 
supply from 100,000 to 500,000, which they can easily do, as hammers may 
be multiplied at will. A, B, C, D, and E, F, G, H will go out of the ham- 
mer business. 

Monopoly Price. — Prices may in certain cases be taken out 
of the field of competition and be controlled by a person or a 
corporation having the exclusive right or ability to produce the 
article. We shall then have monopoly prices. 

Kinds of Monopoly. — A monopoly may be of different kinds : 

A Private monopoly is one possessed by an individual or a 
corporation. 

A Public or State monopoly is one controlled by the state. 
Thus, with us, the mail system is a public or government 
monopoly. In Germany, the railroads are a government mo- 
nopoly ; and in England, the postal telegraph service is one. 



62 PRICE 

A private monopoly may be Natural or Artificial. 

A private natural monopoly exists when a private individual 
or corporation obtains control of a natural product of the land 
through ownership of the land, and becomes the sole producer 
of the article for commerce. 

A private artificial monopoly exists when an individual or 
a corporation obtains the control of an article of trade or of 
a privilege of transportation. Such an artificial monopoly may 
be Legal or Capitalistic. 

In a Legal monopoly, a legal right, e.g. by copyright or 
patent, is obtained for the exclusive production of an article of 
commerce, or for the exclusive performance of some service, such 
as the operation of railroads and street railways. 

In a Capitalistic monopoly, a combination of capital absorbs 
all the principal dealers in an article and practically controls 
the market. 

Monopolies can, in general, fix their own prices for the article 
under their control. 

In public or government monopolies, the government fixes 
the price. When the government is not seeking revenue from 
its monopoly, it fixes a price sufficient to cover the expenses 
incurred in conducting the business. 

Private monopolists are influenced, in fixing prices, by their 
business interests. Though a monopoly price may be fixed 
very high, yet there is a limit beyond which it will not go. That 
limit is reached when consumers refuse to purchase the article. 
When the price becomes exorbitant, people will cease to desire 
the article and will seek some substitute that will replace it. 
Monopolists are seeking profits, and they will not endanger 
their prospects of profits by making the price so unreasonable 
as to leave the article unsold on their hands. They know, too, 
that their profits will be greater when there are many purchasers 
at a low price than when there are few purchasers at an exorbitant 
price. Capitalistic monopohsts also know that exorbitant prices 
would invite competition. Self-interest, then, will be the rule 
determining monopoly prices. 



PRICE FIXED BY LAW 63 

Monopolists can affect the prices by controlling the supply 
ot the article. As they have the exclusive right or power to 
produce the article, they can determine how much shall be 
placed on the market. By controlling the supply, they can 
keep up the prices. 

Ethical View of Monopoly Prices. — From an ethical point of 
view, monopoly prices are not unjust when they are fair and 
reasonable in the estimation of prudent men, and when the 
profits derived from the sale of the article are not excessive. 
In regard to many articles that contribute to the comforts or 
the luxuries of life, no one is obliged to buy the articles. Those 
who desire them may be supposed to be willing to pay even an 
exorbitant price. No injustice, therefore, is done the buyers 
when high prices are fixed for such articles of luxury. 

It may be, however, .that a monopoly will be secured in re- 
gard to some of the necessaries of life. These things the people 
must have in order to live, and when advantage is taken of 
this general need and prices are made exorbitant, justice as 
well as charity may be violated. 

Price Fixed by Law. — The Classical School, which repudiates 
all intervention of the state in matters economic, denies both 
the right and the propriety of the state to fix the prices of com- 
modities. This view has been generally accepted on the sup- 
position that prices are determined by principles which work 
out their fulfillment irrespective of all action of the state. The 
state cannot control these principles. 

In recent times, this view has been modified, and governments 
have claimed the right to regulate prices in certain cases. The 
Railroad Commission, for example, exercises the right to deter- 
mine the freight and passenger charges of railroads. The in- 
tervention of the government, however, has hitherto been 
limited to corporations performing a public service of some kind. 

The state can indirectly affect prices by restraining the un- 
just aggressiveness of trusts and monopolies, by condemning 
oppressive combinations that limit competition, and by oppos- 
ing speculation in natural products. 



64 PRICE 

Some writers claim that because the state is the guardian 
of justice and the protector of the feebler elements that compose 
it, it has the right and at times the duty of curbing the avarice 
and rapacity of dealers and of determining a maximum price, 
at least when there is question of the necessaries of life. Such 
may be said to be the view of the Catholic School. 

QUESTIONS 

' I. What are the different methods of studying Economics? What are 
the main subdivisions of the subject ? Why are wealth, value, and 
price studied before production ? 

2. What is the difference between the popular sense of wealth and the 

economic sense? What is public wealth? Private wealth? Give 
examples of public w^ealth. 

3. Does a want have to be based on a rational motive in order to be a 

want in the economic sense ? Explain what is meant by capacity 
to satisfy a want. Show how air, water, sunshine, can become objects 
of wealth. Give examples of objects that are not wealth because 
not exchangeable. 

4. Should immaterial things be considered as wealth ? Is money wealth ? 

Which of the things in the list on page 37 are wealth? 

5. What is meant by subjective and objective value? What is the dif- 

ference between value in general and economic value? 

6. Illustrate by practical examples how different things, such as a coat, 

corn, iron, diamonds, have value, showing how the various causes of 
value affect them. 

7. Disprove the theory that labor is the sole cause of value in things. 

Explain marginal value by a concrete example. 

8. Explain the difference between value and price. What is the Scholastic 

doctrine of price? Why is it called the Scholastic doctrine? 

9. Where would you find the market prices of vegetables and fruits ? 

10. Explain dealings in stocks in the New York Stock Exchange. What 

is a "bucket-shop" ? The "curb" ? A "corner" ? Give an illustra- 
tion, fanciful or real, of stock manipulation. 

11. Give historical instances of variations in general prices. Explain the 

system of Index Numbers. 

12. Give practical examples in illustration of the laws of variations in prices. 

To what general principle may the laws be reduced ? 
i^. Show by example that the law of supply and demand does not work 
out rigorously. Illustrate by examples the secondary causes of 
fluctuations in prices (p. 56). 



QUESTIONS 65 

14. What is the eflfect of competition on prices? on cost of production? 

Explain the laws affecting competition and prices. What effect on the 
laws is produced by the power to multiply the commodity at will? 
Illustrate. 

15. What are the different kinds of monopoly? What determines a 

monopoly price? 

16. Discuss the question whether the state should fix the prices of any 

commodities. 



POL. ECON. 



CHAPTER III 
PRODUCTION. FACTORS OF PRODUCTION 

I. Production 

There is an immense amount of wealth in the world. The 
source of all this wealth lies primarily in the materials supplied 
by land and water. Innumerable forces are set at work upon 
the materials thus supplied, and these forces, under man's 
intelligent direction, produce economic utilities or things possess- 
ing value and constituting economic wealth. The study of the 
production of wealth will lead, therefore, to the investigation 
of the various factors that are capable of creating economic 
value in things otherwise worthless, and to a review of the nu- 
merous mechanisms, such as exchange, money system, banking, 
insurance, trade, transportation, corporations, that have been 
called into existence by production. 

The study of production will show us how wealth is created. 
But the scope of economics does not end here. It must pro- 
ceed to consider the problems that surround the consumption 
of the wealth produced, and to attempt to answer the difficult 
questions of how and in what proportions the created wealth 
is to be distributed among the several agents that have created 
it. We begin with the study of Production. 

Definition and Factors. — Production is defined as " the 
operation by which man creates or augments economic utility 
in material goods." (Antoine, Cours d'economie sociale, p. 300.) 

Other writers define it as " the creation of economic utilities 
by the application of man's mental and physical powers to the 
materials of nature " (Ely, Outlines of Economics, edit. 1908, 
p. 121) ; or, '' The origination by conscious human act of wealth 

66 



DEFINITION AND FACTORS 67 

or of direct gratifications such as commonly proceed from 
wealth." (Andrews, Institutes of Economics, p. 34.) 

The factors that produce wealth are Nature, Labor, and Capi- 
tal. 

Nature means all that nature offers to man, the earth or land, 
its treasures of minerals, its forces. 

Labor means the mental or physical acts of man applied to' 
the materials or the forces offered by nature. 

Capital is that part of wealth which is applied to the pro- 
duction of more wealth. 

If we study the definitions of production given above, we notice 
that nature and labor enter into the essence of production. For 
production we must have nature, i.e. the offerings of nature, and 
labor or man's energy applied to nature. These two factors 
are interdependent. The things of nature would not produce 
wealth unless labor were applied to them, and labor cannot be 
performed unless nature offers the materials. These two are, 
then, the original factors of all production. 

Not so capital. Capital does not enter into the definition of 
production. It is not in the same class as nature and labor. It 
is itself a product of nature and labor. It is, however, essential 
to production, for a laborer must have the means of subsistence, 
he must have clothing, tools, implements, and machinery. All 
these things constitute capital in its broad and general sense. 
The custom, therefore, which gives three factors of production 
— nature, labor, and capital — may well be followed, since it is 
practically universal. 

Kinds of Production. — Production may be considered as 
Public or National and Private or Individual. 

Public production means production by a nation or the sum 
of all productions by the individuals composing a nation. 
Private production means production by an individual or a set 
of individuals. 

Product. — That which immediately results from the co- 
operation of the three factors of production, — nature, labor, 
and capital, — is product. 



68 PRODUCTION 

We speak of Gross product and of Net product. Gross prod- 
uct is the value of the sum total of the objects produced; Net 
product is the value of the sum total of the objects produced 
less the cost of production. Net product is also called Profit. 

Cost of Production. — The cost of production embraces all 
the various expenditures that have been made in order to pro- 
duce. It includes the following items : — 

1. Wages paid for the labor employed in production, includ- 
ing salary paid the employer. 

2. Rent paid for the use of land. 

3. Interest paid for the use of the capital invested. 

4. Taxes imposed on the articles produced, or on the indus- 
try itself. 

5. Raw material. 

6. Machinery and repairs. 

7. Transportation to market, storage, advertising of goods. 

8. Insurance. 

All these items constitute the cost in private production. 
This cost must, first of all, be covered before there can arise any 
profit from the business, and it is this cost in private production 
which determines the prices of commodities. 

The cost in public production is the cost borne by the state 
or nation considered as a whole. It will e\ddently be smaller 
than private cost, because in many of the items cited above the 
state does not suffer any loss. Thus, the money paid for rent, 
interest, and insurance generally remains within the state. It 
is transferred from one citizen to another. Taxes are a source 
' of revenue to the state. The cost of transportation to market, 
storage, and advertising, which falls on certain individuals of 
the state, is a gain to other individuals within the same state. 
Practically, the only items that would enter into public cost 
might be reduced to : — 

1. The wear and tear on brain and muscle of those employed 
and the expense incurred in keeping laborers in condition. 

2. The raw material used up in industry. There is a gradual 
exhaustion of the supplies furnished by nature. 



PRODUCTIVE INDUSTRIES 69 

3. The repairs of machinery and the replenishing of the cir- 
culating capital. 

Productive Industries. — As the world has progressed, pro- 
ductive industries have increased. At first society was very 
simple, and its wants were simple and easily satisfied. The in- 
dustries needed to satisfy all the wants of primitive society were 
few. Hunting, fishing, the cultivation of the soil, in order to 
procure the food necessary for life, the making of clothing for 
wear, the construction of rude dwellings for shelter, constituted 
the first industries in society. Gradually people gathered into 
cities, and the wants of men increasing, new industries arose 
to supply these wants. There came about the development of 
industries, of arts and sciences, that we read of in the histories 
of the ancient peoples. Then a halt was called in the onward 
progress of the industrial world, and the long quiescence of 
the Middle Ages followed. The revival of modern industry 
began in the latter part of the eighteenth century, when what is 
known as the Industrial Revolution took place. Agriculture 
sprang into new life, new methods in the treatment of the soil 
were introduced, agricultural products commanded higher prices. 
In the manufacturing industries the domestic system had hith- 
erto prevailed. Under this system material was given out by the 
manufacturers and carried to the homes of the laborers, where 
it was worked on for piece wages. Then the factory system 
was introduced, owing to the inventions in machinery which 
began in the last half of the eighteenth century. Industries 
increased throughout the world, domestic and international 
commerce opened up abundant markets for products, facilities 
of transportation brought the producer and the consumer in 
closer contact. The era of capitalism set in, and industries on 
a large scale, financed by accumulated capital, began to absorb 
and to replace small individual enterprises. 

The industries engaged in production in the United States are 
countless. They may be classified as follows : — 

Plant industries, which include lumbering and the cultivation 
of the cereals, cotton, vegetables, fruits, sugar-producing plants, 



70 PRODUCTION 

— the sugar cane and the sugar beet, — tobacco, forage prod- 
ucts, ^- Uke hay, grass, and clover. 

Animal industries, engaged in the raising of sheep, hogs, 
cattle, poultry, bees, the silkworm, draft animals ; fishing ; the 
hunting of wild game and fur-bearing animals. 

Mineral industries, which relate to petroleum, natural gas, 
bitumen, salt, fertilizers, — such as gypsum, phosphates, and 
marl, — stone, cements, clays, iron, gold, silver, copper, lead, 
tin, zinc, mercury, aluminum. 

Manufacturing industries, which are engaged in work upon 
the raw materials supplied by the preceding industries. It 
would be impossible to enumerate them here. Some of the 
principal manufacturing industries are the textile and clothing 
trades, metal-working, the building trades. 

Commercial industries, including transportation by water 
and by land, telegraph, telephone, banking, wholesale and retail 
dealing. (Cf. A. P. Brigham, Commercial Geography.) 

End of Production. — The question may be asked : What is 
the end intended by production ? If we look around us, we see 
marvelous activity existing among all classes of men, and all 
directed to the production of various utilities ; we see millions 
of toilers going forth with each rising sun to help in the great 
work of production ; we see innumerable machines running 
from morning till night intent on the same work. And at the 
sight we may well ask ourselves : What is the end of it all ? 

Is the end of production mere wealth for wealth's sake? the 
accumulation of money in the vaults of the national treasury 
or in the banks of corporations or of some few favored indi\T.d- 
uals? Surely that is an unwarranted limitation of the end of 
production. Production is but one element among many which 
make up the activity of the composite social system. 

Now the end of the social organization is directly the temporal 
well-being of the producers and indirectly the common well- 
being of society. Production as one of the elements of the social 
mechanism should also tend to the well-being of the individual 
as well as to the well-being of society. 



LAWS OF PRODUCTION 7 1 

And still we may have the spectacle of a country with its 
production estimated at billions of dollars, with 70 per cent of 
its producers making but a scant subsistence. We may have the 
spectacle of a country where immoral tastes are created and en- 
couraged by the production of obscene literature, of immoral 
statuary and pictures under the name of works of art, w^here 
production busies itself more with luxuries than with necessaries, 
where in the interests of production family life is destroyed, the 
sanctity of the Sunday ignored, and the elementary education 
of the child hindered. 

Laws of Production. — These considerations lead us to the 
laws by which production must be regulated, if it would attain 
its twofold end — the particular well-being of the producer, 
and the general well-being of society. They are the following: 

1. Production should correspond to consumption, and should 
not excessively surpass the demand. The Liberal School de- 
clares that this matter will regulate itself automatically. And 
yet there have been commercial crises brought about by over- 
production, which caused a glut in the market, the failure of 
many producers, and much misery among the laboring class who 
were thrown out of work. In some countries, production is 
regulated by syndicates composed of producers, who study the 
market and preserve an equilibrium between production and 
consumption. 

2. Production of things injurious to health or morals should 
be prohibited, and production should be employed in satisfying 
the wants of men in the order of their importance, the necessaries 
first, then the decencies or comforts, and finally the luxuries. 

3. Production should not oppose the moral interests of society 
by destroying family life, by infringing on the rest and sanctity 
of the Sunday, or by employing child labor and thus preventing 
the elementary education of children. 

The state, by wise and moderate laws, should regulate these 
various matters. Hitherto the world has been dominated by 
the Liberal School, whose principle is that the state should not 
interfere at all in matters of production. This view is gradually 



72 FACTORS OF PRODUCTION — NATURE 

giving way to a more reasonable view of the functions of the 
state, and in recent years the state has passed wise and neces- 
sary laws affecting production and commerce. Witness the 
interstate commerce regulations, the child-labor laws, the coal 
strike interference, the pure food laws, the employers' liability 
act. (Cf. Antoine, Cours cfeconomie sociale, p.^304.) 

Factors of Production. — We now come to consider each of 
the factors of production, — namely, nature, labor, and capital. 

II. Nature 

Place of Nature in Production. — Nature is an essential 
factor in production. It must furnish the materials of all in- 
dustries, the soil, the minerals hidden in the earth, and the 
forces which can be utilized by the intelligent power of 
man. 

Man creates nothing. He accepts the things which nature 
offers him, and uses them directly, as vegetables, fruit, coal, 
or indirectly, laboring on them as raw materials out of which 
he fashions other articles of use. 

One of the primary objects which nature offers to man is land, 
and in regard to land the following points of physical geography 
enter into the calculations of economists. (Cf . Devas, Political 
Economy, 3d edit., p. 27.) 

I . The character of the different parts of the earth as a dwell- 
ing place for man. Thus, climate has a perceptible economic 
influence on production. Those regions where a temperate 
climate prevails possess great advantages over others where 
severe cold benumbs or intense heat enervates the faculties. 
In very cold countries, the long winters and the deep snows and 
the scant vegetation are hindrances to plentiful production, 
whereas in very warm countries men are content to take what 
bounteous nature offers, and bestir themselves but little to turn 
to profit the abundant resources at hand. Moreover, in these 
latter countries there exists another impediment to enterprise 
in the violence of the physical forces, in the heavy rains, the dev- 



PLACE OF NATURE IN PRODUCTION 73 

astating floods, the earthquakes, and the hurricanes, which are 
so frequent. 

2. The facilities of communication. England owes much of 
her commercial supremacy to her insular position, and the North 
and South Americas are favored by the large navigable rivers 
which course through them. 

3. The fertility of the land. 

4. The stock of minerals. 

5. The supply of natural forces, such as water power for mills. 

6. The abundance of fish to be found in the surrounding and 
inland waters. 

7. The freedom from destructive agencies, as from tornadoeSj 
floods, and earthquakes. This is a negative quality. 

The more the land of a nation is possessed of these advantages, 
the greater will be the productive capacity of the nation, since 
production depends on the factors which conduce to it. 

And again, the more generous nature is to a country in land, 
land products, and forces, the greater will be the number of 
objects possible of production and the greater will be the possible 
wealth of the country. 

We can here understand the immense wealth that lies within 
our own country. It has a temperate climate, countless water- 
ways, great fertility of soil, stores of minerals, great natural 
forces in its rivers and mill streams, rich fisheries, and com- 
parative freedom from destructive agencies. 

Production, as we said, will depend on the factors of pro- 
duction. Whatever limit there is in production will come from 
a limit existing in its factors. Now when we study nature as 
a factor of production, we find that it has its limitations. 

Law of Diminishing Returns. — Land, the first offering of 
nature, with all its secret stores of wealth and its forces, with all 
its abundance of raw materials, is not equally extensive in all 
countries. 

Again, in any one country, a considerable portion of the land 
is occupied by cities, towns, and villages, furnishing dwelling 
places for the inhabitants. Acres are devoted to streets, high- 



74 FACTORS OF PRODUCTION — NATURE 

ways, and parks. All this portion must be deducted from the 
quantity of land, when we would compute the productive land 
contained in a country. It is the first great limitation to nature. 

But the productive land that remains and that supplies land 
products for food, raw material for manufacture, minerals, and 
forces, is itself subject to limitation. It is true that the pro- 
ductiveness of land may be increased by the application of more 
labor and capital to it. The more labor and capital there are 
put into the land, the greater will be the returns from the land, 
and every increase of labor and capital will mean an increase in 
the returns. Hence is derived what is called by some the law 
of Increasing Returns. Yet there will come a time when an 
equilibrium will be estabhshed between the forces applied and 
the product yielded, and when it will not be profitable to add 
another increment of labor and capital. '' After a certain point 
is reached in the cultivation of every piece of land, it is found 
that doubling the laborers and doubling the capital put upon 
the land will not double the number of bushels which the land 
will yield." (LaughHn, Political Economy, p. 37.) 

This fact has given rise to the formulation of the Law of Di- 
minishing Returns, and indicates a further limitation of nature 
as a factor of production. 

Before explaining the law, we should know what is meant by 
Intensive and Extensive production. 

Intensive and Extensive Production. — Intensive production 
is the application of improved methods to a small area in order 
to secure the greatest possible results. Extensive production 
is the cultivation of large tracts of land by the ordinary means 
readily at hand. 

In order to satisfy an increased demand for a product, the 
first step ordinarily is to seek out new fields for cultivation. 
This is extensive production. When at length all the land 
capable of cultivation has been turned to use, the increased 
demand will have to be supplied by intensive production. 

It is to this latter kind of production that the law of diminish- 
ing returns applies. 



LAW OF DIMINISHING RETURNS 75 

Intensive production is carried on in the neighborhood of 
cities, and is an especial feature in countries long civilized, as in 
France and Belgium. Extensive production may be seen, for 
example, on the immense farms of our Western states. 

The accompanying diagram will explain the matter : — 




Let O, the center of the figure, represent a city. The in- 
habitants of the city will require for subsistence a certain amount 
of produce. At first, when the number of inhabitants is small, 
the lands marked a a a a will be used and will suffice for the 
produce needed. As the number increases, the lands marked 
b b b b will be put under cultivation. A still greater increase of 
inhabitants will bring the lands c c c c into use. This is extensive 
production. 

Now when all the available lands have been made use of, 
the farms a a a a will, through the application of more capital 
and labor, be made to increase the product to satisfy a still 
further demand owing to a still further increase of population. 
The lands b b b b and c c c c will be treated in the same way 
on still further demand. This is intensive production. 

Law of Diminishing Returns Illustrated. — The law of dimin- 
ishing returns may be illustrated in the following manner : — 



76 



FACTORS OF PRODUCTION — NATURE 



A certain piece of land produces potatoes under different 
conditions (A, B, C, D, etc.). The price of potatoes is 60 cents 
per bushel. 





Conditions of Land 


Labor 


Capital 


Bushels 
Per Acre 


Gain 


Total 


Individual 


A 

B 

C 

D 

E 

F 

G 

H 

J 


I 
2 

3 

4 

5 
6 

7 
8 

9 


$ 50 
100 
150 
200 
250 
300 
350 
400 
450 


20 
50 
120 
210 
280 
330 
360 
380 
390 


$ 12 
30 
72 
126 
168 
198 
216 
228 
234 


$12.00 
15.00 
24.00 
31-50 
33-60 
33-00 
30.85 
28.50 
26.00 





Column A, B, C, etc., represents a piece of cultivated land 
under different conditions of labor and capital. The labor and 
capital columns indicate the gradual new additions of labor and 
capital put into the land. As a result of the additions of labor 
and capital, the bushels returned by the land will continually 
increase, but while they will increase at first considerably, they 
will gradually diminish relatively to the amount of labor and 
capital. The same gradual relative diminution will be seen in 
the total gain column. If the land were cultivated by individ- 
uals, each one supplying the new addition of labor and capital 
and receiving equal shares of the returns, it will be seen, by 
consulting the individual gain column, that there will come about 
a condition (E) where the gain will be the greatest and beyond 
which it would not be profitable to add more labor and capital. 

The law applies equally to mines. Here, as in the former case, 
every increase of product is attained by an increase of outlay 
in labor and capital, and there comes a moment when the smaller 
increase of product will not warrant the greater increase of outlay, 
and thus the profitable productiveness of the mine is arrested. 

It will be noticed that the law of diminishing returns will 



DEFINITION OF LABOR 



77 



not bring about a total cessation of production, but there may 
come a time when, through the working out of the law^ pro- 
duction will be retarded relatively to the amount of labor and 
capital employed in it, and a limit may be reached beyond which 
the increase of profitable production will cease. 

The law may apply to local production from land. It may 
apply to the production of certain lines of commodities. But, 
if there is question of the world's production from land and 
mines, the limit is yet very distant, and it is rendered still more 
distant by new inventions in machinery which reduce the 
expenses of labor, and by the opening up of new lands for cul- 
tivation and of new mines for exploiting. Still it is a difficulty 
which will have to be met and settled by future generations. 

III. Labor 

Definition of Labor. — The second factor in the production 
of wealth is labor. 

Labor means the mental or physical acts of man applied to the 
materials and forces offered by nature. Devas defines labor as 
''human action of which the proper end or natural purpose is 
some good external to itself." 

This factor, like the former, is essential to all production. 

There can be no production without it. Even those things which 

are produced spontaneously by nature require, in order to become 

■ wealth, that man shall make them his own by at least some mental 

or physical act. 

Requisites of Labor, (i) Movement. ^—'Laibor in its last 
analysis is reduced to movement, a change of place, whether of 
the entire object which is produced, or of the different parts 
which compose it. Thus a husbandman plows the earth 
and places in the furrow the seed, which is acted upon by the 
forces of nature and from which is evolved by their agency the 
perfect grain. The manufacturer places in position the several 
parts of an object, and steam or electricity operating a machine 
unites them and makes the completed object. The transporter 



78 FACTORS OF PRODUCTION — LABOR 

of goods brings the object from one place where it is of less value 
to another where it is of greater value. 

(2) Toil or Pain. — Productive labor always presupposes some 
degree of toil or pain. Labor, to be labor, must have the motive 
of necessity. The fisherman who catches fish for his own pleas- 
ure, for the sport he finds therein, is not laboring, nor the boat- 
man who rows five miles of a morning for exercise or recreation, 
nor the driver of a vehicle who goes forth for his daily drive of 
pleasure ; but the fisherman who fishes for his living, to make 
money by his haul, and the boatman who rows passengers and 
collects his ferriage, and the driver who drives for the fare he will 
receive, are all laborers. 

The motive and the end make the difference between these two 
classes of men. In the latter, the end which acts as an impelling 
motive is the necessity of living and the need of providing sus- 
tenance for the present or provision for old age and sickness. In 
the former, the end which inspires the actions is the intrinsic 
pleasure of the efforts put forth. 

(3) Time. — Labor requires a certain expenditure of time, and 
in calculating the extent to which labor contributes to production, 
one must calculate the amount of time that is or can be devoted 
to labor. 

The time out of a man's whole life which he can devote to 
actual labor is comparatively short. In some occupations that 
time is shorter than in others, because of the unhealthful nature 
of the occupation. Thus, copper, lead, and earthenware manu- 
factures show a very high mortality among the workingmen, and 
lead and copper mining still higher. 

Even in occupations that present no specially unhealthful 
features, the time of a laborer's life devoted to actual labor is 
very short. 

Supposing the normal human life to be seventy years, if a 
man begins to labor at the age of eighteen and retires at the age 
of sixty, he will have labored but three fifths of his life. Calcu- 
lating more closely, we find that a man of seventy, who labors 
from his eighteenth year to his sixtieth year, estimating 300 days 



LABORING CLASS 79 

in the year and 8 hours a day, has worked 100,800 hours out of 
the 613,620 hours contained in his whole hfe, or less than one 
sixth of his life. 

A man does not work every day of the year. In some trades 
it is impossible to work except in seasonable weather, as in agri- 
culture, building, etc. Many days are to be deducted because 
of Sundays and national or state holidays during which no labor 
is done. 

Nor does a man work all the hours of the day. A man's day 
of labor consists of 12, 10, or 8 hours. In European countries, 
the daily hours of labor are usually longer than in the United 
States. It may not always follow that the amount of product 
turned out is greater, when the daily hours of labor are longer, 
for the energy and the efhciency of the laborer may be greatly 
increased by the longer hours of freedom from toil and may 
result in an increase of production. 

Laboring Class. — The whole amount of labor is done by the 
laboring class. Who constitute the laboring class ? 

The laboring class, broadly considered, embraces all those who 
produce, whether directly or indirectly. It embraces, therefore, 
as contributing directly to the product, the unskilled laborer, 
the skilled mechanic, the man in the ofhce who designs the objects 
upon which the laborer works, lays out the plans of great under- 
takings, determines the machinery employed, the methods pur- 
sued. It embraces, as contributing indirectly, the teacher who 
informs the minds of the laborers present or future, the clergy- 
man who instills into them principles of morality, and the police 
and the army who preserve peace and protect each one in his 
labor. 

Efficiency of Labor. — Naturally, the more efficient labor is, the 
more it will contribute to production and the greater and the 
better will be the product. Now there are certain things 
which conduce to the greater efficiency of labor, some affecting 
the physical being of the laborer, some his mental being, and 
some his moral being. 

(i) Physical Helps. — The labor of a country will be more 



8o FACTORS OF PRODUCTION — LABOR 

efficient the greater the amount of physical strength inherited 
by the laborers. The healthier the preceding race of laborers, the 
healthier will be the succeeding race. Anything which may 
cause a preceding race to deteriorate will work for harm in the 
succeeding one, and in so far reduce the efficiency of labor, and, 
by curtailing production, lessen the wealth of the state. 

The amount and quality of food consumed by the laborer will 
affect the efficiency of labor. There is perhaps no class of labor- 
ers so well fed as the American. A large slice of common sour 
bread makes up the breakfast of many a French factory em- 
ployee. Meat is scarcely tasted by the working classes of 
Holland. Potatoes, bread, and chicory constitute the entire 
sustenance of certain classes of laborers in Belgium. In the 
west of England meat is eaten but once a week. Such condi- 
tions, under which the laborer is reduced to the lowest possible 
amount of food, scarcely sufficient to keep life in the body, must 
evidently work against the efficiency of labor. 

Again, the more perfect the sanitary conditions which sur- 
round the dwelling places and the workshops of the laborer, the 
more will his physical condition be bettered and the greater will 
be the results of his labor. Here also the American laborer is 
more fortunate than the European. 

(2) Mental Helps. — The efficiency of a man's labor will be 
in proportion to his mental development. " Clearness of mind, 
quickness of apprehension, strength of memory, and the power 
of consecutive thought " will make one laborer better than an- 
other, and when possessed in a great degree by a whole nation 
or by. the generality of laborers in a state, will increase the 
efficiency of its labor above that of a nation not so endowed. 

An intelligent laborer can learn his trade in much less time 
than is required by another, needs little or no superintendence, is 
less wasteful of materials, learns quickly the use and the handling 
of the most delicate and the most intricate machinery. 

(3) Moral Helps. — Self-respect, prudence, self-control, hon- 
esty, cheerfulness, and hopefulness are evidently factors making 
for the betterment of laborers as such. The driven slave, who 



HIERARCHY OF LABOR 8 1 

finds no cheer or hope in his life and who cannot improve his 
condition, will work as little as he can and is in sad contrast to 
the free laborer, who recognizes the responsibility reposed in 
him. The free laborer has a standard of honesty to which he 
conforms, and works cheerfully towards the betterment of his 
condition in the hope of more restful days to come. 

Hierarchy of Labor. — Economists have made out w^hat is 
called the Hierarchy of labor. It is a classification of the differ- 
ent forms of labor according to the economic utility of each, i.e. 
according to the measure in which each contributes to produc- 
tion. It is as follows : — 



Agriculture. 

Manufacture. 

Labor of transportation. 

Commerce. 

Official employments. 



The following tables will show how at different times the labor- 
ing class in the United States has been divided among the several 
occupations : — 

1880 — x\griculture 7,670,493 

Manufacture and mechanical mining 3,837,112 

Trade and transportation 1,810,256 

Professional and personal service 4,074,238 

All occupations 17,392,099 

1890 — Agriculture, fisheries, mining ... 9,013,201 

Manufacture and mechanical industries 5,091,669 

Trade and transportation 3,325,962 

Services : Professional 944,323 

Domestic and personal 4,360,506 

All occupations 22,735,661 

1900 — Agricultural pursuits 10,381,765 

Manufacturing and mechanical pursuits ..... 7,085,309 

Trade and transportation 4,766,964 

Services: Professional 1,258,538 

Domestic and personal 5,580,657 

All occupations 29,073,233 

(Stat. Abstr. U.S. 191 2.) 

POL. ECON. — 6 



82 FACTORS OF PRODUCTION — LABOR 

It is gratifying to note that in the United States so large a 
number of persons belonging to the laboring class are em- 
ployed in agricultural pursuits. There is little doubt that agri- 
culture in all its various forms is the main source of the wealth 
of this country. It is agriculture that supplies the main food 
products and furnishes most of the raw material that enters into 
manufactures. It is a wise policy, therefore, to encourage agri- 
culture by every possible means. 

Such in fact has been the policy of many of our prominent 
statesmen. While it is almost impossible to induce those already 
engaged in other occupations and already located in the great 
cities to enter into agricultural pursuits, the United States gov- 
ernment has sought to divert the tide of immigration towards 
rural districts. It has instituted at Washington a special 
Division of the Bureau of Immigration. This office fur- 
nishes information to immigrants which may direct them away 
from the seaboard centers, now overcrowded, to those sec- 
tions of the country which offer special facilities for agri- 
cultural labor. (Cf. 1907 Report Dep't Com. and Lab., 

PP- 9, I39-) 

Law of Population — Doctrine of Malthus. — Labor is a 

factor of production. It would be reasonable, therefore, to sup- 
pose that the more the laboring class increased, the greater 
would be the production and consequently the greater would be 
the wealth. 

But if we restrict our view of production to that form of it 
which applies to the produce of land, the produce which serves 
for the sustenance of the human race, we shall find that theoreti- 
cally there is danger that the increase of population may in 
time become so great that there will not be sufficient production 
to sustain it. 

This fact was brought emphatically before the public mind by 
T. R. Malthus, an Englishman, in his work entitled An Essay 
on the Principle of Population, published in 1798. 

His doctrine is contained in the formula : " Population tends 
to increase in a geometrical progression, whilst the means of 



DOCTRINE OF MALTHUS 83 

subsistence can only increase in an arithmetical progression." 
Thus, 

Progression of Population : i, 2, 4, 8, 16, 32, 64, 128, 256, etc. 
Progression of Production : i, 2, 3, 4, 5, 6, 7, 8, 9, etc. 

A family of two has four children ; in the next generation, 
there will be eight, and so on, in each generation there will be a 
geometrical increase, until at the end of 200 years, the ratio 
between population and production would be 256 to 9; at the 
end of 300 years, 4096 to 13 ; and at the end of 2000 years, the 
difference in the ratio would have assumed enormous propor- 
tions. 

To quote Mai thus himself (Essay, Bk. I, ch. i) : ''It may 
safely be pronounced, that population when unchecked goes on 
doubling itself every twenty-five years, or increases in a geomet- 
rical ratio. 

'' The rate according to which the productions of the earth 
may be supposed to increase, it will not be so easy to determine. 
Of this, however, we may be safely certain, that the ratio of their 
increase must be totally of a different nature from the ratio of 
the increase of population. A thousand millions are just as 
easily doubled every twenty-five years by the power of popula- 
tion as a thousand. But the food to support the increase from 
the greater number will by no means be obtained with the same 
facility. Man is necessarily confined in room. When acre has 
been added to acre, till all the fertile land is occupied, the yearly 
increase of food must depend upon the melioration of the land 
already in possession. This is a stream which, from the nature 
of all soils, instead of increasing, must be gradually diminishing. 
But population, could it be supplied with food, would go on with 
unexhausted vigor ; and the increase of one period would furnish 
the power of a greater increase the next, and this, without any 
limit." 

The doctrine is applied to the whole world usually, but it may 
be applied to a country or a state, and hence it may be that the 
population of a country or a state will increase beyond the 



84 FACTORS OF PRODUCTION — LABOR 

means of sustenance. The consequence of the increase of popu- 
lation over production and the upsetting of the equiUbrium that 
should exist between population and production, will be destitu- 
tion, misery, and want among the people, especially among the 
poorer classes, who have not the means to pay the increased 
prices of the necessaries of life. The increased prices will be 
brought about by the greater demand owing to the increased 
population, and the comparatively decreased supply due to the 
relatively smaller amount of production. 

To quote again (Malthus, Essay, Bk. I, ch. 2) : " These 
effects, in the present state of society, seem to be produced in 
the following manner. We mil suppose the means of subsistence 
in any country just equal to the easy support of its inhabitants. 
The constant effort towards population, which is found to act 
even in the most vicious societies, increases the number of people 
before the means of subsistence are increased. The food there- 
fore which before supported eleven millions, must now be divided 
among eleven millions and a half. The poor consequently 
must live much worse, and many of them be reduced to severe 
distress. The number of laborers also being above the propor- 
tion of work in the market, the price of labor must tend to fall ; 
while the price of provisions would at the same time tend to rise. 
The laborer, therefore, must do more work to earn the same as 
he did before. During this season of distress the discourage- 
ments to marriage, and the difficulty of rearing a family, are so 
great, that population is nearly at a stand. In the meantime 
the cheapness of labor, the plenty of laborers, and the necessity 
of an increased industry among them, encourage cultivators to 
employ more labor upon their land, to turn up fresh soil, and to 
manure and improve more completely what is already in tillage ; 
till ultimately the means of subsistence may become in the same 
proportion to the population as at the period at which we set out. 
The situation of the laborer being then again tolerably comfort- 
able, the restraints to population are in some degree loosened ; 
and, after a short period, the same retrograde and progressive 
movements, with respect to happiness, are repeated." 



DOCTRINE OF MALTHUS 85 

There are, however, certain checks on population which tend 
to prevent it from reaching the Umit where subsistence could no 
longer be obtained and thus retard the working out of the law. 
Some of these checks are positive : war, pestilence, disasters, 
disease, to which all the human race is subject, and which together 
with the condition of starvation and want due to the over-in- 
crease of population, will tend to reduce the population. When 
there is question of a single country, emigration is another posi- 
tive means of checking the overgrowth of population, and this 
usually takes place in a country where living conditions are 
intolerable. 

These positive checks tend to prevent the over-increase of 
population and to bring about an equilibrium between popula- 
tion and production, so that the well-being of the race may not 
be disturbed. 

But the positive checks are not sufficient to arrest the action 
of the law. Another, a negative check, is recommended by 
Malthus; namely, self-restraint with regard to marriage and 
the procreation of children. People are advised not to add to 
the increase of population. One who foresees that he cannot 
provide for a family should not enter into the marriage state, 
and, if already married, he should not have more children than 
he can well provide for. 

As proposed by Malthus, the negative check is not immoral. 
When he counsels self-restraint with regard to marriage, he means 
that persons should not enter into marriage unless they have an 
assured means of providing for their offspring. When he coun- 
sels self-restraint among married people with regard to the pro- 
creation of children, he means that this should be taken in the 
strictly moral sense. 

In his Essay, Bk. I, ch. 2, he says: ''Of the preventive 
checks, the restraint from marriage which is not followed by 
irregular gratifications may properly be termed moral restraint." 
A note hereto is appended : "It will be observed, that I here 
use the term ' moral ' in its most confined sense. By moral 
restraint I would be understood to mean a restraint from mar- 



86 FACTORS OF PRODUCTION — LABOR 

riage, from prudential motives, with a conduct strictly moral 
during the period of this restraint ; and I have never intention- 
ally deviated from this sense. ..." 

Such is the doctrine called the doctrine of Malthus. It has 
been defended by economists of great repute, and it has been re- 
jected by others equally renowned. It has gradually permeated 
society, and has had a most pernicious effect, giving rise to many 
of the crimes against humanity so numerous in entire nations 
to-day. 

The Malthusians, so-called followers of Malthus, seem to have 
cut adrift from all moral principle, and have taught that for the 
betterment of the human race its increase must be curtailed by 
every means however vicious and immoral. Hence the preva- 
lence in many countries and in many parts of the United States 
of crimes against nature, of infanticide and abortion, and all 
the evil effects, individual and social, resulting from such a state 
of things. 

Doctrine of Malthus Rejected. — (i) From the Moral Standi 
point. — The preventive check, even if understood as a moral and 
prudential abstinence from marriage and the natural results of 
marriage, and even if advocated along strictly moral lines, is 
based on a too optimistic view of human nature, which supposes 
such self-restraint possible among the great generality of men, 
and especially among the too frequently ill-educated poorer 
classes. 

It supposes an impossible degree of virtue among people who, 
by circumstances, surroundings, and lack of education and self- 
discipline, would naturally be least capable of possessing it. 
Hence the adoption of such a principle of action, if adopted at 
all, will undoubtedly be followed by all kinds of evil and vicious 
practices. 

There is, however, a possibility that the principle will not be 
adopted at all by certain classes of people. Thus, there exists 
among the poorer classes a motive that would induce them to 
have as large a progeny as possible. This motive is the hope of 
the parents of increasing their own income through the work of 



DOCTRINE OF MALTHUS REJECTED 87 

their children. The children are put to work at an early age 
and the wages of the children add to the family revenue. The 
grown-up sons and daughters, moreover, are relied on to support 
the parents in their old age. Indeed, the effects of the doctrine 
are seen not so much among the very poor, though they are 
gradually increasing even there, as among the wealthier and more 
educated classes, who are not wanting in the means to support 
and educate a numerous offspring. 

The doctrine of Malthus is rejected by many on account of its 
pernicious tendency to the promotion of immoral practices. It 
is attacked by others from an economic point of view. 

(2) From the Economic Standpoint. — It is denied that pro- 
duction has not kept pace with population. Whatever may 
have been the condition of things during the life of Malthus, 
since his time there has been an immense improvement in pro- 
ductive methods and an immense increase in the resulting prod- 
uct. The introduction of machinery, the large-scale methods 
of production only now in their beginning, the opening up of new 
lands, the intensive cultivation of old lands, the acquisition of 
new countries with all their untold wealth, have in the past 
century given production a great gain in advance of the grow- 
ing population. 

Nor is there any well-grounded fear for the future, for it is 
impossible to conceive that productive forces have reached their 
limit of efficiency or inventiveness. When new demands are 
made, new means of satisfying the demands will be created. 
The doctrine of Malthus has indeed ceased to be the bugbear it 
formerly was. 

Yet it is given prominence to-day by many who would seek 
an easy way of explaining the misery and want that exist among 
the poorer classes, and who would divert attention from the 
real causes of present conditions. 

These causes are not overpopulation and insufficient pro- 
duction, but are to be sought for rather in the improper methods 
of the distribution of wealth, in human injustice and selfishness, 
in the spirit of greed that closes the hearts of men to the dictates 



88 FACTORS OF PRODUCTION — LABOR 

of charity and fairness. The remedy lies in the awakening of a 
sense of justice and Christian charity in men, in the realization 
by mankind of a higher purpose than the accumulation of dollars 
for the gratification of ambition or sensual appetite, in the restric- 
tion, by wise legislation and governmental measures, of injustice 
and oppression. There are many to whom such a remedy does 
not appeal, and hence they ignore the real causes of the condition 
of the classes, and would set up another cause, the remedy for 
which would lie within the power of the classes themselves. 

Hindrances to Production. — It must be said that, while pop- 
ulation is ever increasing, the production of the necessaries of 
life, though at no time inadequate to supply the needs of man- 
kind, may be hampered by several things, such as : — 

1. The absorption by private individuals of large areas of 
land for game preserves and parkways and the keeping of the 
same out of cultivation. Instances may be found in England 
and Ireland, where immense landed estates are held by families 
for generations, yielding little or nothing to the store that is 
needful for the sustenance of the nation. 

2. The concentration of the productive forces in the produc- 
tion of commodities that gratify a passing fancy and are called 
for by luxury and extravagance. Such production does not add 
to the sum of the foodstuffs of the world. 

3. The frequent limitation, by monopolies and combinations 
of capitalists, of the production of even the necessaries of life 
in order to keep up the prices. 

4. The application of labor and capital to manufacturing 
industries rather than to agricultural industries. There has 
been in the United States a gradual falling off in the numbers 
engaged in agricultural pursuits as compared with all occupa- 
tions during the past forty years. 

The following table shows among all the occupations the per- 
centage of those engaged in agricultural pursuits : — 

1870 . . . 47 per cent 1900 . . . 35 per cent 

1880 . . . 44 per cent 1910 . . . 33 per cent 

1890 , . -37 per cent (Yearbook Dep't Agr. 1910.) 



DIVISION OF LABOR 89 

People are attracted to the large cities, centers of manufac- 
turing industries, and they become so accustomed to the excite- 
ment and pleasure of city life that they cannot be diverted to 
agriculture. Such is the experience of the United States. Even 
the vast majority of the immigrants, who come in hundreds of 
thousands yearly to our shores, are dispersed among a few of the 
large centers of the manufacturing industries. In the fiscal 
year ending June 30, 191 1, 64 per cent of the immigrants to 
this country went to New York, Pennsylvania, Illinois, Massa- 
chusetts, New Jersey. (Cf. Annual Report, Dep't Com. and 
Lab., 1911, p. 171.) 

Division of Labor. — (i) In the Nation. — We can conceive 
a family living by itself segregated by long distances from all 
others. In such a family the various occupations necessary 
for the production of the various necessaries of life would be 
carried on by the members of the family. The procuring of 
food, the making of clothing, the construction of buildings, 
farming, hunting, fishing, would all be done by one or another 
member of the family. 

If, however, other families should gather about the first and 
establish a community, a town, it would then be possible to 
have a division of the occupations among the members of the 
increased community according to the capacities manifested 
by each for some one of the necessary occupations. Thus, 
there would arise in the community a baker, a carpenter, a 
builder, a procurer and seller of game and fish, and what 
was accomplished in the first place by one family would now 
be done by separate individuals of the several families living 
together. 

In this way would be brought about the first form of division 
of labor into different trades and occupations. This division 
of labor is made possible by the cooperation of all the members 
of the several families. What was impossible when the family 
lived isolated and alone now becomes feasible where many are 
gathered together in a community. The baker who employs 
his whole time in baking bread must get what other food he 



go FACTORS OF PRODUCTION — LABOR 

needs, must get his clothing, his house, from the labor of some 
other members of the community in which he lives. And so 
for all the other workers. Each depends on the cooperation of 
others. 

Let the members of the community increase in numbers, 
and it will be readily seen that this division of occupations 
will expand to an even greater extent, until the smallest de- 
tails of labor may become the sole occupation of many indi- 
viduals, and the diversity of the special trades may become 
indefinite. 

This division of labor applies to the whole state or country, 
and even to the whole world. Because of the internal trade 
within the state or country, people of various sections of the 
country are enabled to apply themselves to some particular 
industry to the exclusion of other industries. Because of 
international commerce, peoples of various parts of the world 
may apply themselves to a restricted number and kind of 
industries. Thus, there is a country- wide and a world-wide 
division of labor. 

(2) In the Workshop. — There is a second kind of division of 
labor which applies to the workshop. Production may be carried 
on on a small scale, as is done by individual producers who have 
but a moderate capital to invest in business ; or it may be 
carried on on a large scale, where, for example, many capitalists 
pool their capital and invest in some business. In a small 
business, one man may have to handle the article which is 
produced from its inception in the raw state to its completion as 
a finished product. Where the production is carried on on a 
large scale and many laborers are employed, the labor of pro- 
ducing the manufactured article may be divided among a dozen 
or more laborers. 

It is only when there is large production, or production on a 
large scale, that it will be profitable to carry out this workshop 
division of labor. 

(Illustrate by describing the work done in a hat factory, in an 
iron foundry, in a shoe factory.) 



DIVISION OF LABOR 91 

Advantages and Disadvantages of the Division of Labor. — 
Division of labor, whether in its first form or in its second, has 
its advantages and its disadvantages. 

(i) In the Nation. — In its first form, when taken in its 
broadest aspect, it enables the people of one country or of one 
section of a country to apply themselves to the development 
of the peculiar advantages proper to their own locality. Thus, 
they may excel in mining or in agriculture or in manufacturing 
industry, and, applying themselves more or less exclusively to 
one of these occupations, may rely on other countries or other 
portions of their own country to supply them with the products 
of other occupations. 

In the United States, agriculture is the chief occupation in the 
Mississippi Valley, mining in the Rocky Mountain region, 
manufactures in New England, each of these sections affording 
special natural facilities for its peculiar occupation, and the 
mechanism of commercial exchange which exists between all 
sections of the country obviates the inconveniences which 
might arise from this exclusive application to one occupation. 

A serious disadvantage may arise to a country from this 
division of labor. In time of war, a country that applied itself 
exclusively to manufactures could not have food enough to 
live on if an effective blockade were established around its 
borders, and it would soon be starved into submission. An 
agricultural country under similar circumstances would suffer 
from the lack of manufactured articles. The United States 
would have little trouble in this regard, but some other coun- 
tries are not so fortunate. Thus, diversity of occupations is 
advised in order to supply all the needs of a country at all times. 

(2) In the Workshop. — When considered in its second form, 
as found in the workshop, division of labor has the following 
advantages : — 

1. Complicated labor is broken up into very simple and 
mechanical movements easy to execute. 

2. Portions of the divided labor may be assigned to each 
laborer in proportion to his capacity. 



92 FACTORS OF PRODUCTION — LABOR 

3. Great dexterity is acquired by the constant repetition of 
the same act. 

4. There is economy of time. 

5. There is economy of tools. 

6. The period of apprenticeship is shortened. Less time is 
required to learn a small detail than a complete trade. 

The disadvantages of this second division of labor are : — 

1. The degradation of the laborer, who becomes a mere 
machine. 

2. The great dependence of the laborer, who knows no entire 
trade, but merely a small part of a trade. He will find it diffi- 
cult to get employment at any other branch of his trade. (Cf. 
Gide, Principles of Political Economy.) 

These disadvantages are offset by the great advantages that 
are found in division of labor. 

Machinery. — In 1769, James Watt took out the first patent 
for the steam engine, and since that time there has been a great 
revolution in labor. Machinery has been introduced in agri- 
culture, in manufactures, in transportation, in mining, in every 
branch of production where hand labor can be employed. 

The capitalist views with joy the advent of machinery, while 
the laboring class looks upon it with hatred and anger, rising 
up in riot at times and destroying the newly set up machines. 
This happened in England when the spinners and weavers 
found themselves on the point of being superseded by machines. 

Advantages of Machinery. — Machinery has its advantages 
and its disadvantages. The advantages are : — 

1. The employment of machinery increases production. One 
machine is able frequently to do the work of three, four, or even 
ten men, and there naturally will be an increase in the product. 

2. It brings about regularity and precision of work. No 
matter how diligent or how skilled a hand workman may become, 
there is always the chance of deviation from the perfection of the 
design intended. A machine works with absolute precision and 
turns out identical products. 

3. It saves time. Among handworkers much time is lost, 



MACHINERY 



93 



some part of it unavoidably, some part through the indifference 
and carelessness of the workers. A machine eliminates all the 
time loss due to human frailty or negligence. 

4. The cost of production is diminished. This will naturally 
follow from the lessening of wages and the increase of the prod- 
uct. 

5. The price of the finished product is lowered. In manufac- 
turing industries, where the product can be increased indefi- 
nitely at the will of the producer, the supply can be made to 
equal the demand. Again, as the cost of production is de- 
creased, competition will tend to bring down the price of the 
product near to the cost of production. 

6. The price of raw material is in many cases diminished. 
Many raw materials are themselves a product of machinery in 
some form or other and can be turned out with a saving of cost 
and in greater quantity, allowing their sale with profit at a 
lower price. 

Disadvantages of Machinery. — The disadvantages of ma- 
chinery are : — 

1. The introduction of machinery throws the laborer out of 
employment. This is a real disadvantage, and for the time 
being at least is sorely felt by the laboring class. In time, how- 
ever, those thrown out of employment will find other employ- 
ment in other trades or indeed in different branches of their 
former trade, through the increase of production brought about 
by the introduction of machinery. Thus, one hundred years 
ago there were eight thousand employed in the cotton mills in 
England; to-day, there are five hundred thousand employed, 
precisely through the introduction of machinery. 

2 . Immense loss of life and limb. In New York State the total 
number of injuries received in factories, quarries, and tunnel con- 
struction amounted, in 1910, to 25,390, distributed as follows : — 

Temporary injuries ....... 20,520 

Serious, probably permanent ...... 2,476 

Permanent injuries ........ 2,041 

Deaths 353 

(N. Y. State Dep't Labor, 1910 Report of Factory Inspection, p. 134.). 



94 FACTORS OF PRODUCTION CAPITAL 

In the same year, the number of accidents from machinery 
was 11,245. (^^-j P- ^3^-) 

The laws, however, should safeguard against accidents, and 
during recent years much has been done in this matter. 
Factory inspection has become more thorough, and the 
prosecution of those who fail to observe the laws has been 
carried on more energetically. 

IV. Capital 

Definition of Capital. — The third factor in production is 
Capital. Capital is that part of wealth which is devoted to the 
production of more wealth. 

Capital is always less than wealth. All of a man's possessions 
will not be devoted to productive purposes ; all will not be sunk 
in business or in investments with the intention of reaping a 
monetary profit. A certain portion of what he owns will be 
devoted to the procuring of enjoyment, to the adornment of 
person or home, to expenditure which will bring no increase 
to his possessions. 

A man may receive through inheritance $100,000. If he 
devotes $50,000 of that sum to leasing land, building a plant, 
and starting some manufacturing business, he has turned one 
half of his wealth into what is technically called capital. 

It is the same with regard to the wealth and capital of a 
nation. All the wealth of the nation is not actually employed 
in producing more wealth. Only that portion of the wealth 
of the nation which is employed in producing more wealth 
through business or investment is economically termed capital. 

The distinctive feature of capital, then, is that it is devoted to 
the production of more wealth. If a man in business makes a 
year's profit of $25,000, and expends the sum on diamonds and 
luxuries, no part of that profit becomes capital. It takes the 
form of wealth expressed in the diamonds and luxuries. Again, 
if he spends the $25,000 profit in paying laborers to build a 
race track about his grounds for his own amusement, the sum 



DEFINITION AND EXPLANATION OF CAPITAL 95 

expended does not become capital. If he devotes that sum to 
the purchase of new machinery and raw material to be used in 
his business, or if he expends it in draining and improving his 
farm land, so that it may produce a larger and a better crop, he 
has turned his money into capital. 

In accordance with the same principle, oats are capital when 
fed to a dray horse which works on the farm ; they are not 
capital when given to a race horse which the farmer keeps merely 
for fast racing. 

Several things may or may not be considered as capital, accord- 
ing to their relation to the end, viz., the production of more 
wealth. Thus, food when partaken of for the mere pleasure of 
taste is not capital ; when used for strength and muscle to be 
afterwards employed in labor, it is capital. Articles like jewelry, 
laces, pictures, from the point of view of the purchaser who 
buys them for the adornment of himself or his home, are not 
capital ; from the point of view of the jeweler or the storekeeper 
who sells them, they are capital. 

Capital Essential to Production. — Capital is essential to 
production, but not in the same way in which nature and labor 
are essential. Without the materials offered by nature and 
without some kind of labor on that material, there can be 
no production. Capital is necessary to production, because 
through it the material is procured or the laborer is enabled to 
apply his labor to the material. Thus, capital furnishes three 
things to the laborer : — 

1. Sustenance, i.e. food, clothing, and shelter, while he 
labors or until he completes the product. 

2. The tools he makes use of. 

3. The material on which he labors. 

Capital requires Labor. — Capital cannot produce of itself. 
Labor is requisite to make it productive. Men put thousands 
of dollars into banks, bonds, railroad and mining stocks, this or 
that business venture, and one who knows that these men live 
on the incomes received from these investments might be led to 
think that money naturally increases of itseif. But money can 



96 FACTORS OF PRODUCTION — CAPITAL 

never increase of itself. A million dollars if left in a vault will 
not increase by the value of one cent in a thousand years. 

Labor is the active principle which causes money to increase, 
and the incomes of the persons mentioned are all derived from 
the labor, if not of the investors themselves, then of some others 
whose activity is made possible by the capital invested. 

Thus, the incomes from banks are derived from the labor of 
those employed in the undertakings set on foot by the loans of 
the banks to business men ; the incomes from United States 
bonds are derived from the labor of all the taxpayers of the 
country; the incomes of railroad and mining stocks from the 
labor of the thousands who work on the railroads and in the 
mines ; the incomes from business enterprises from the labor of 
the employees engaged in those business ventures. 

Capital needs labor, therefore, to produce more wealth. 
An intimate dependency exists between capital and labor. 
Conversely, there exists just as intimate a dependency of labor 
on capital. Every hundred dollars' worth of capital judiciously 
invested induces more labor, while a diminution of labor is 
entailed by every withdrawal of capital, caused either by un- 
certainty in the business world consequent on great political 
upheavals, the fear of war, or government measures affecting 
the money standard, tariff rates, railroads, and corporations, 
or by the luxurious extravagance of the wealth owners whose 
expenses exceed their incomes. 

Capital results from Saving. — Saving here does not mean 
hoarding. He who hoards day after day will increase his 
wealth, but he does not add to his capital. Saving means the 
abstinence from the use of wealth or a part of it, and the assign- 
ment of it to some one of the various means of increasing it. 

Every one has the absolute right to employ his wealth in any 
way that may suit his own fancy, if he violates no ethical law. 
He may expend it all for his own pleasure. But if he does so, 
he will not increase his wealth, since he puts none out in 
capital. 

To invest capital, then, one must forgo the things which his 



EXPLANATION OF CAPITAL 97 

wealth could procure for him, and the greater is his abstinence, 
the larger will be his capital. A farmer may save by curtailing 
his wants within the limits of his necessaries. The rich man 
may save by denying himself luxuries. 

Capital is consumed in Production. — Capital is consumed in 
producing new wealth. It is consumed in factories, in wages, 
in the buying of raw material, in the procuring and the repairing 
of machinery, in all the various methods employed to make 
business successful. 

When a man possessing $100,000 devotes $50,000 of it to 
capital in some business, he takes a certain amount of risk on 
the capital invested, in the expectation that his venture will 
return him not only the sum invested, but a substantial increase. 
His $100,000 would be safer, perhaps, if stored away in a steel 
vault, but at the end of ten years he will have no more than his 
original $100,000. If he invests one half of it and sinks it in 
factories, wages, taxes, machinery, he exposes his investment 
to the dangers of business disaster, of fire, of the knavery of 
employees, but should he be fortunate enough to escape these, 
and at the same time conduct the business judiciously, at the end 
of the ten years his capital will have reproduced itself twice or 
three times over and his wealth will have proportionately 
increased. 

Kinds of CapitaL — Capital is either Fixed or Circulating. 

Fixed capital embraces the permanent fixtures of a business, 
such as factories, machinery, and tools, which are not used up 
in a single act of production. Circulating capital embraces all 
those elements of a business which are consumed in the act of 
producing. Such are raw material, fuel, and wages. 

The fixed capital will endure for a number of years ; the cir- 
culating capital must be continually renewed. 

The return from fixed capital need not be immediate ; the 
gain of profit on it may extend over the space of several years. 
The return from circulating capital must be immediate, since it 
must be renewed by immediate expenditures. 

Increase of CapitaL — The increase of capital depends on two 

POL. ECON. — 7 



98 FACTORS OF PRODUCTION — CAPITAL 

things, — the amount that can be saved, and the disposition to 
save. 

Every laborer, in whatever class he may be, receives a definite 
compensation for his labor. Of this a certain portion must go 
to the procuring of the necessaries of life, food, clothing, shelter, 
for self and family. Another portion will be expended in pro- 
curing the decencies and comforts of life. All beyond this may 
be saved and go to make up capital. This surplus will depend 
on the amount received by the prospective capitalist. When 
profits and wages are high, the amount which may be saved by 
the employer and the employee will be greater. 

The increase of capital, however, will naturally depend on the 
disposition to save. This disposition is not manifested equally 
by all. The untutored savage lives for the day and foresees not 
the needs of the morrow. Prudence and foresight, the principle 
of present self-denial for the future enjoyment, and the ambition 
for the betterment of one's condition — all come with education. 
Every one can save a little, if he will but learn to restrict his 
wants. This presupposes a degree of self-denial which can 
become possible only when one conceives the future advantage 
to be gained as more important than the present gratification. 



QUESTIONS 

1. Define production. What are the factors of production? What are 

the kinds of production? What is product? 

2. What items enter into the cost of production? 

3. WTiat is the general classification of the productive industries of the 

United States ? 

4. Considering the end of production, what are the laws affecting pro- 

duction ? 

5. Why is nature necessary as a factor of production ? What characteris- 

tics of land add to the productive capacity of a nation? In what 
degree is the land of the United States possessed of these charac- 
teristics ? 

6. What connection is there between the law of diminishing returns and 

production ? What is intensive production ? Extensive production ? 
Illustrate by an example. 



QUESTIONS 99 

7. What is labor? What are the requisites of labor? Explain each by 

an example. Who constitute the laboring class? 

8. What helps to increase the efficiency of labor? What have the laws 

of this country done to increase the efficiency of labor? 

9. Give the classification of the different forms of labor in view of their 

economic utility. Why is agriculture put first? 

10. Why should a wise government encourage agricultural pursuits? 

11. Explain the doctrine of Malthus. Why should the doctrine be rejected ? 

12. WTiat are the hindrances to production? 

13. How has division of labor been brought about ? WTiat are its kinds ? 

What are the advantages and the disadvantages of each ? 

14. Was the introduction of machinery an advantage to society? 

15. Explain how capital is always less than wealth. What is required in 

order that an object of wealth may become capital ? Give examples. 
What does capital furnish to the laborer? 

16. Can capital produce wealth by itself? How is capital consumed? 

What are the kinds of capital? On what does its increase depend? 



CHAPTER IV 
EXCHANGE 

Explanation of Exchange. — Production is not limited to the 
objects which satisfy the producers' own and immediate wants. 
Many things are produced which the producers will never use. 
The producers produce for others. This brings about that 
feature of Political Economy called Exchange. 

Exchange is universal. It makes possible the division of 
labor already spoken of. By reason of exchange individuals 
may apply themselves to one trade or to one part of a trade, 
trusting to receive from others all the various things which they 
need. 

Advantages of Exchange. — The advantages of exchange are 
manifest : — , 

I. Exchange brings into use a large amount of wealth which 
otherwise would remain unused. 

All countries produce various commodities in much larger 
quantities than are called for by the wants of those countries. 
Thus, England produces more coal and manufactures than it 
consumes ; the United States produces more wheat and cotton 
than it consumes. 

Again, in the United States, the New England states produce 
more manufactures than are demanded by the dwellers in the 
New England states ; the South, more cotton than it needs ; 
the West, more farm products than could be consumed by the 
inhabitants of the West. 

All these objects are wealth, and if exchange did not exist, 
the surplus of all these commodities would go to waste or indeed 
would not be produced at all. But by means of exchange, a 

lOO 



MECHANISM OF EXCHANGE lOl 

commodity can find markets outside of the immediate places 
of production, and for that reason it is extensively produced 
and brings into employment an immense amount of capital and 
labor. 

2. Exchange enables men to utilize in the best way the pro- 
ductive capacities which they may have. 

A great number of productive industries are required to supply 
man with all the things he needs for a comfortable existence. 
If exchange did not exist in any form, every man would have to 
apply himself to each of these industries in order to supply his 
needs, and for such universal production he would be but ill- 
fitted. But, because of exchange, he may apply himself to some 
single kind of productive industry for which he has greater 
aptitude, relying on exchange to furnish him with the various 
objects which he himself does not produce. 

And thus it is that while the individual is laboring for others, 
the whole world is laboring for him. As De Laveleye says: 
" The poorest workman consumes the products of two hemi- 
spheres. The wool for his clothes comes from Australia; the 
rice for his pudding from the Indies ; the wheat for his bread 
from Illinois; the petroleum for his lamp from Pennsylvania; 
his coffee from Java ; the cotton for his mfe's dress from Egypt 
or from Alabama ; his knife from Sheffield ; the silk of his necktie 
from France." {Elements d^economie politique.) 

3. Exchange places each object where it has greatest value. 
The tastes and customs of people differ. One man or one com- 
munity may value what another cares little for. 

4. Exchange increases the production of wealth. It increases 
the number of the markets. 

Mechanism of Exchange. — Exchange has brought about the 
establishment of a vast mechanism necessary to facihtate it, in- 
cluding : — ^ 

1. The traders or middlemen who devote their whole time to 
the work of exchange. 

2. The extensive systems of transportation, — wagon roads, 
railroads, and merchant vessels. 



I02 EXCHANGE 

3. The weights and measures used in trade. 

4. The money and credit required by trade. 

5. The system of legislation affecting debts, bankruptcy, the 
regulation of railroads, the inspection of various products, and 
the establishment of Consular Agencies in foreign countries for 
the promotion of commercial interests. 

Middlemen or Traders. — The middlemen or traders deserve 
special study. 

The first kind of middleman to appear is the traveling trader, 
who carries about the wares he has purchased from the producers 
to dispose of them to the consumers. The caravans of the East 
still conduct trade in this manner. The \dllage peddler is still 
to be found in our midst. As civilization develops, the traveling 
trader gives place to the shopkeeper, who advertises his goods 
and attracts the consumers to him. 

(i) Advantages. — Society derives certain advantages from 
the trader : — 

1. The trader serves as a middleman between the producer 
and the consumer, and saves each the trouble of seeking out the 
other. 

2. The trader buys goods wholesale from the producer and 
sells them retail to the consumer, thus facilitating trade on both 
sides. 

3. The trader keeps goods in stock, and so holds the market 
normal. 

(2) Disadvantage. — A disadvantage may arise because of the 
trader, when the number of traders becomes very great. When 
the cost of production of an article is diminished through the 
introduction of machinery and the various economies that may 
be found possible in the continued production of an article, the 
price of the article does not always decrease ; on the contrary, 
the prices^ of some such articles have risen. This may be 
brought about in some measure by the great number of middle- 
men engaged in the retail business. Each addition of a middle- 
man tends to increase the price. The fact may be explained 
by the following example : — 



MIDDLEMEN OR TRADERS 



103 



Number of Shoe 
Stores 


Expenses 


Demand 


Cost of 

Production 

PER Pair 


Price per 
Pair 


I 

2 

3 


$12,000 
each 8,000 
each 6,000 


5,000 
2,500 
1,667 


$2.40 
3.20 
3.60 


$2.60 
3-40 
3-8o 





In a town, one shoe store is established, supplying the demand 
which is placed at the figure 5000. The expenses may be esti- 
mated at $12,000, including rent, taxes, wages, insurance, and 
the 5000 pairs of shoes to supply the demand, and may be con- 
sidered as the cost the trader is put to in order to place the 5000 
pairs of shoes on the market. The cost to him of each pair of 
shoes is, therefore, $2.40. He would have to fix the price of his 
shoes at $2.40 merely to cover expenses. If he is content to 
make twenty cents on each pair of shoes, he will sell his shoes 
for $2.60. 

Now let us suppose two shoe traders in the town, each supply- 
ing half the demand, or 2500 each. The expenses for each may 
be fixed at the figure $8000. It will be less than in the former 
case, because there is less to pay for wages, the smaller demand 
requiring fewer employees, and for shoes, since the supply will 
need to be but half of what it was before. The expenses will 
be more than half of what they were in the former case, because 
certain items of expense, such as rent, insurance, etc., will not 
vary much in either case. The cost of placing the shoes on 
the market will be $3.20 a pair. Now if the shoe dealers are 
to make twenty cents on each pair over and above what may 
be here called the cost of production, they must charge the con- 
sumer $3.40 for a pair of shoes. 

If three shoe dealers are established in the town and each 
supplies one third of the trade, we find by the same reasoning 
that the price of the shoes per pair might be $3.80. 

It will be evident that the increase in the number of retailers 
of shoes will raise the price of shoes. 



I04 EXCHANGE 

Transportation. — Another factor which enters into exchange 
and has an effect on the expense attendant on it is Trans- 
portation. 

Exchange may indeed apply to the transfer of the title of 
ownership in things immovable, or to pure speculation, where no 
actual transfer is made of the commodities dealt in ; but, ordi- 
narily, exchange or trade implies the transference of the com- 
modity exchanged from one place to another. This entails a 
great expenditure, and of course has an immediate influence on 
the price of the article. 

The greater the difficulty of transportation, the greater the 
expense. The difficulties arise from (i) distance, (2) the nature 
of the commodity, and (3) the condition of the ways of com- 
munication. 

1. It will be necessary at times to transfer certain commodi- 
ties a great distance before a profitable market can be found 
for them. 

2. In transporting articles we must consider their weight, 
their size, their fragihty, and the difficulty of preserving them 
while in transit. The progress made in compai'atively recent 
years in fast railways and fast steam vessels, and in the means 
of preserving perishable goods, has lessened difficulties which 
in the past were insurmountable. 

3. All the various ways of travel offer more or less difficulties. 
Conveyance by country roads is ordinarily very costly. The 
rate for freightage by railroad is sometimes low and sometimes 
high. Transportation by sea is usually less expensive. (See 
Transportation, p. 277.) 

QUESTIONS 

t. What are the advantages of exchange? 

2. What vast mechanism is originated by exchange? 

3. Who are the middlemen ? What advantages do they bring to society ? 

4. Explain by example how middlemen may increase the prices of com- 

modities. 

5. How does transportation affect the expense of exchange? 



CHAPTER V 
MONEY 

I. Origin and Definition of Money 

Development of Money. — Money has been brought into 
use by exchange. Before the mtroduction of money the ex- 
change of goods was carried on by barter. Barter is a system 
by which the various things capable of exchange, as, for example, 
commodities and services, are compared one with another and 
the transfer of one for another effected. 

The system of barter obtained universally in the past and 
endures even to-day in countries where the use of money has not 
been introduced. The inconveniences and the difficulties of 
such a system are easily conceivable. Great as the annoyances 
would be while commerce remained in its most primitive stage, 
they would have increased immeasurably upon the multipli- 
cation of occupations and the variation of products which mod- 
ern advance has brought about. A new system was evidently 
needed, and as peoples rose higher in the scale of civilization, 
they soon abandoned barter and made use of some medium 
of exchange. Some object was taken which had a value rec- 
ognized by all the community. That object became a standard 
of value. The values of all exchangeable objects were esti- 
mated by the standard, and it became an easy matter to de- 
termine the amount of one commodity that should exchange for 
another. The admitted standard was called money. 

Money is to be conceived as a generic term embracing any 
object which serves as a medium of exchange and a measure of 
value. In the earliest times among the Greeks and Romans 

105 



Io6 ORIGIN AND DEFINITION OF MONEY 

money consisted of cattle. Hence the word pecus (cattle) has 
given rise to the derivatives pecunia (money), " pecuniary," 
" peculation." 

Oxen were used as money in the old Homeric days. Sheep 
were used among the Italians ; cattle among the Scots and 
Welsh at the time of the abandonment of Britain by the Romans. 
Rice was used as money in Japan, squares of pressed tea in 
Central Asia, furs in North America, glass beads in Africa, 
salt in Abyssinia, oil in the Ionian Islands, wampum in New 
England, tobacco in Virginia. 

At an early date, the metals came into use as money. The 
earliest metallic Roman money was the cbs, a copper piece. 
Iron was used in Lacedemon ; lead, tin, silver, and gold were all 
used in early times. 

All the various kinds of objects, all the several metals even, 
used at one time or another as money, have been gradually 
superseded by gold and silver. People have been led to the 
choice of these metals because of their physical properties, their 
luster, their malleability, their durability, and their high value. 

There are not wanting some who declare that there was a sort 
of providence which directed men to the choice of gold and silver 
as the money of the world. Nature apparently supplied these 
two metals that they might be used as money. Others with 
more apparent reason declare that the choice of gold and silver 
was a purely fortuitous, arbitrary act on the part of man. And 
they point to the history of money throughout the world. The 
precious metals were chosen as a universal medium only in 
comparatively recent times. Peoples were attracted at first 
by the physical quahties possessed by these metals, just as some 
were attracted by the glass beads and the wampum, which be- 
came valuable because they were sought after as a means of 
personal adornment. ♦ 

The metals were first made up in ingots and were weighed and 
assayed. Money dealers were obliged to carry about with them 
their scales and balances for weighing and their chemicals for 
testing the value of metals offered to them. 



DEVELOPMENT OF MONEY 107 

Later the ingots were cut into some kind of regular form, and 
their weight and standard were marked on them by some 
official stamp. Money was counted, not weighed as before. 
It is probable that money was first coined by a king of Lydia, a 
successor of Gyges, between 700 and 650 B.C. 

Finally, the ingots were made into pieces like those now in 
use, small disks stamped on both sides and milled. 

Properties of Gold and Silver as Money. — Gold and silver 
have special economic properties which fit them for the purpose 
of money. These properties are : — 

1. Facility of transportation. Great values can be trans- 
ported in comparatively small volume, and the cost of trans- 
portation is much less for gold and silver than for other species 
of merchandise. 

2. Durability. They endure for a long period of time and 
when joined to alloys may pass for years in circulation without 
any great loss of material. 

3. Identity of quality. As they are simple elements, chemi- 
cally, they are the same the world over. Wheat, on the con- 
trary, to make use of an object for comparison, differs in quality 
from section to section of the country in which it is raised. 

4. Difficulty of counterfeiting. Gold and silver are recog- 
nizable by color, weight, and metallic ring, and their imitation 
is difi&cult. 

5. Divisibility. Divide a piece of gold or silver in halves, 
and each half has half the value of the whole, while the two 
halves together are equal to the whole. Each fractional part 
has a fractional value proportionate to its weight, and all the 
fractional parts put together are equal to the original whole. 
(Gide, Principles of Political Economy, 1905 edit., p. 214.) 

Definitions of Money. — Stanley Jevons defines metal money 
thus : " Coins are ingots of which the weight' and fineness are 
guaranteed by the government, and certified by the integrity 
of the designs impressed on the surfaces of the metal." 

Walker {Money, Trade, and Industry, p. 4) defines money thus : 
" Money is that which passes freely from hand to hand through- 



Io8 ORIGIN AND DEFINITION OF MONEY 

out the community, in full discharge of debts and full payment 
for commodities, being accepted equally without reference to 
the character or credit of the person who offers it, and 
without the intention of the person who receives it to con- 
sume it, or enjoy it, or apply it to any other use than in turn 
to tender it to others in discharge of debts or payment for 
commodities." 

The writer illustrates his definition by showing how tobacco 
came to be used as money in Virginia. 

Tobacco w^as raised plentifully throughout the state. It was 
brought to the main stores and there exchanged for various 
commodities. A comparison was made between a certain 
weight of tobacco and those commodities, and an exchange 
effected. This was merely barter. But when the people of 
Virginia found that tobacco had a certain fixed value with ref- 
erence to commodities, they began to use it in exchange for all 
sorts of things. It was used to pay the lawyer and the physician 
and the services of hired laborers, and this fact, that it was uni- 
versally used as a medium of exchange for all things, constituted 
it money. 

And so for other objects; the moment they become a medium 
of exchange, no matter w^hat their use or purpose may be, they 
become money. Glass beads among the Arabians, wampum 
among the Indians of New England in the seventeenth century, 
shells and feathers among the islanders of the Indian Ocean, 
served these several peoples merely for personal adornment, and 
yet they were money. 

" Money," then, as Walker says, " is always a medium of 
exchange; an intermediary thing; a means, not an end." 
{Money, Trade, and Industry, p. 7.) 

Money is legal tender when the laws of the state declare it 
to be a full acquittal when offered in payment of a debt. A 
creditor must accept legal tender money when offered in payment 
by the debtor. Money is not legal tender when the state does 
not by law declare it capable of canceling debts. 

Money may be legal tender to an unlimited amount, as are 



COIN OR VALUE MONEY 109 

gold and silver with us ; or to a limited amount, as is our sub- 
sidiary coin. 

Money is at par, at premium, at discount, with reference to 
some other money, when it equals in value some other money 
with which it is compared, or is worth more or less than that 
other money. 

" Lawful money " in the United States includes gold coin, 
silver dollars, United States notes, and Treasury notes. 

Money is foreign or domestic, when reference is made to 
different countries. 

II. Kinds of Money 

Money, with reference to the basis on which it circulates, 
may be divided into (i) coin or value money or metal money; 
(2) paper or credit money ; (3) money of account. 

Coin or Value Money. — Coin or value money is money 
possessed of real value. It may be standard, or subsidiary, or 
minor coin. 

The standard coin of any country is '' that in which its statutes 
make all public and private obligations and dues receivable and 
payable, to any amount." (Denslow, Principles of Economic 
Philosophy, p. 336.) In the United States, the gold coins are 
standard coins. 

Subsidiary coin embraces the divisions of the standard coin, 
generally silver, below the unit of measure. 

Minor coins are the smallest fractions of the unit of measure, 
usually of a metal other than gold or silver. 

The silver dollar and the subsidiary and minor coins in the 
United States are at present Token money, i.e. each piece has 
less intrinsic value than it has face value. 

The United States gold and silver certificates really belong to 
the class of value money, since each certificate represents a sum 
of gold or silver actually deposited in the United States Treasury. 

Paper or Credit Money. — Paper or credit money is a promise 
to pay. It represents a value which depends on the credit of 
the issuer of the paper. Paper money is Redeemable or Con- 



no KINDS OF MONEY 

vertible, if it is exchangeable for coin or " lawful money," as is 
at present all our paper money; or it is Irredeemable or In- 
convertible, if not exchangeable for coin or '' lawful money." 
This latter kind of money is also called " fiat " money or '' paper 
money " in the strict sense of the term. Examples of this money 
are the " greenbacks " and the Confederate notes issued during 
the Civil War. The " greenbacks," however, became con- 
vertible in 1879. 

Convertible money may become inconvertible through the 
refusal or the inability of governments to provide actual 
coin for its redemption. '' No paper money is convertible, 
the full, immediate and unconditional redemption of which 
is not, at all times, within the choice of the holder." (Walker, 
Political Economy, p. 153. Cf. Gide, Principles of Political 
Economy, p. 260 et seq.) 

If the government would so determine, and all the people 
would grant consent, it would be possible to put into circulation 
this conventional paper money. It would serve all the pur- 
poses of money. 

(i) Defects of Paper Money. — There are, however, three 
features in which paper money is deficient as compared with 
metallic money. 

1. The value of paper money is precarious. It depends on 
the will of the legislator and can be destroyed by the power 
which created it. It has no intrinsic value. Metallic money 
has its own inherent value arising from its natural qualities 
independent of the stamp of the government. 

2. The value of paper money is restricted to the country 
which issues it. It will not be received as money in foreign 
countries. Standard money will pass anywhere on its weight. 

3. The value of paper money is changeable, as the amount 
and consequent value of such money depends on the will of the 
government. Even though the government tries to limit the 
amount strictly to the requirements of trade, trade itself will 
vary from period to period, being now brisk, now dull, and the 
amount of paper money will be greater or less than the actual 



PAPER OR CREDIT MONEY III 

requirements. The value of metallic money depends on natural 
causes, on the output of the mines. Its amount ordinarily can- 
not depend on the will of man. In trade depressions following 
on greater activity, there may be a surplus of metallic money, 
but it can find outlets in foreign countries, whither the excess 
will naturally flow. 

These disadvantages of paper money as compared with me- 
tallic money would disappear if all the governments of the world 
would consent (i) to make legal tender a paper money which 
would be acceptable in all countries ; and (2) to limit the issue 
in each country to the amount required by trade, this amount 
not to be augmented arbitrarily, but in a measure predetermined 
for each nation. 

(2) Efect of Paper Money on National Wealth. — The issue 
of paper money would not add directly to the wealth of a nation. 
It would do so, however, indirectly. It would set free the im- 
mense sum of metallic money now in use, and allow it to be 
employed as capital in various industrial pursuits. 

Thus, the United States has a billion and a half dollars in 
metallic money. Other nations have like sums. Were these 
sums of coin used as capital in the promotion of production or 
in investments in foreign securities, great revenues would accrue 
to the countries so using them. 

Again, paper money. would indirectly increase the wealth of 
a nation by setting free the labor of various kinds now employed 
in the production of metallic money. This labor could be em- 
ployed in other industries which would add to the wealth of 
the nation. 

Besides all this, the issue of paper money would be a very 
easy and inexpensive way for a government to pay its debts. 
If it borrows money, it will have to pay interest. If it issues 
bonds, it burdens future generations with a heavy tax. Whereas, 
if it issues paper money, the sole expense is the cost of manu- 
facture. In the Franco-Prussian war, France issued notes to the 
amount of $300,000,000, and our own country ordered several 
large issues of paper money during the Civil War. 



112 KINDS OF MONEY 

In spite of its possible advantages, there are many economists 
who declare that paper rftoney is the greatest plague that could 
ever befall a nation. This is due not so much to paper money 
in itself, as to the imprudence of governments in issuing a greater 
amount than is needed for circulation. We have had examples 
in our own history of the evils resulting from over-issue of 
paper. Another instance may be found in the time of the French 
Revolution, when the government issued " assignats " to the 
enormous amount of forty-five billion francs. This was twenty 
times the amount of coin then in the country. The inevitable 
result followed, and the assignats depreciated in value. In 1796, 
the hundred franc ($20) assignat was worth seven cents, and 
it required 4000 francs ($800) to buy a pair of shoes. 

(3) Signs of Over-issue of Paper Money. — Now there are 
certain signs which indicate that the amount of paper money in 
circulation is greater than is required by the state of trade. 
These are : — 

1. A premium on gold. When the amount of paper money is 
too great, its value will begin to depreciate. This fall 'm. value 
will manifest itself in relation to metallic money. Gold will be 
sought for to pay foreign bills, and, to secure it, a premium will 
be paid for it. During the Civil War and for many years after- 
wards, gold stood at a premium in the United States. 

2. A rise in the rate of exchange. Bills of exchange are al- 
ways payable in gold, the international money, and will be af- 
fected as is gold itself by a depreciation in the paper money. 

, The rate of exchange wdll rise. 

3. The disappearance of metallic money. This will be 
brought about by the working out of the principle enunciated 
in Gresham's law (p. 128). 

4. A rise in prices. When the paper money has depreciated 
considerably, prices will rise. This is in accordance with a 
principle affecting prices explained in subsequent pages. Some- 
times there are quoted two different sets of prices for all com- 
modities, one payable in metallic, and the other in paper money. 

When these signs begin to manifest themselves, it is the duty 



KINDS OF MONEY IN THE UNITED STATES 113 

of the government to curtail the amount of paper money in 
circulation, if it would prevent the evils of inflation and restore 
the financial world to its normal state. This it can do by can- 
celing the paper notes as they are returned to the government 
treasury. In April, 1866, Congress passed a law for retiring 
and canceling paper notes at the rate of $4,000,000 a month. In 
less than two years, $44,000,000 of the notes had been retired. 
(Cf. Gide, Principles of Political Economy, p. 280.) 

Money of Account. — This expression is used to indicate the 
kind of money unit current in a country. Thus, in England, 
the pound is the money of account ; in France, the franc ; in 
Germany, the mark ; in the United States, the dollar. 

Kinds of Money in the United States. — The various kinds 
of money used in the United States are the following : — 

(i) Gold Coins: $20.00 piece = Double eagle. 
10.00 piece = Eagle. 
5.00 piece = Half eagle. 
2.50 piece = Quarter eagle. 
3.00 piece 
1. 00 piece 

The last three are but little used. The coinage of the $1 
gold piece was discontinued by act of Congress, Sept. 26, 1890. 

Gold coins must weigh 25.8 standard grains to the dollar 
(23.22 fine grains), and be nine tenths fine, i.e. nine tenths 
must be pure gold and one tenth alloy. They are legal tender 
to an unlimited amount. 

(2) Gold Bidlion. — Gold in blocks or bars uncoined. These 
are as good as coin and are much used in foreign trade, when 
gold is shipped by weight. 

(3) Gold Certificates. — These are paper and certify that an 
amount of gold equal to the face value of the certificate is de- 
posited in the United States Treasury. They can be exchanged 
for gold on demand. Their denominations are $10 and over. 

(4) Silver Dollars. — The face value of the silver dollar is 
greater than the value of an equal weight of silver bullion, i.e. 

POL. ECON. — 8 



114 KINDS OF MONEY 

it is token money. The silver dollar must contain 412.5 stand- 
ard grains, and be nine tenths fine, i.e. it must have 371.25 
grains of pure silver. The coinage of the silver dollar ceased in 
1905. It is legal tender to any amount, except when otherwise 
stipulated in the contract. 

(5) Silver Certificates. — These are paper bills for $100, $50, 
$20, $10, $5, $2, and $1. For each silver certificate, an equal 
amount of silver is deposited in the United States Treasury. 

Gold and silver certificates are not legal tender. They are, 
however, receivable for all public dues. 

(6) Subsidiary Coins. — These are silver, 50 cents, 25 cents, 
10 cents. There formerly existed a three-cent piece, but it is 
no longer coined. The subsidiary coins are legal tender to the 
amount of $10. They contain 385.8 grains to the dollar, nine 
tenths fine. 

(7) Minor Coins. — These are the nickel 5-cent piece and the 
copper i-cent piece. The 5-cent piece contains 77.16 grains, 75 
per cent copper and 25 per cent nickel. The i-cent piece con- 
tains 48 grains, 95 per cent copper and 5 per cent tin and zinc. 
The minor coins are legal tender to the amount of 25 cents. 

(8) United States Notes. — These are called '' Legal tender 
notes " and " Greenbacks." They were originally issued during 
the Civil War, and are promissory notes of the government. 
They are paper and are not backed by gold or silver deposited 
in the treasury as are the certificates. Since 1879 they have 
been redeemable, i.e. the government will exchange coin for 
them. One hundred and fifty million dollars is kept on deposit 
in the Treasury for their redemption. When at first issued they 
were legal tender for all debts, public and private, except customs 
duties and interest on the public debt. Since 1879 they have 
been receivable for duties. Thei'' total amount is limited to 
$346,681,016. When redeemed they are issued again. 

(9) National Bank Notes. — These are paper notes of various 
denominations issued by the National Banks. As legal tender, 
they are limited. As the act of June 3, 1864, Sec. 23, says : they 
are '' received at par in all parts of the United States in payment 



MEDIUM OF EXCHANGE 1 15 

of taxes, excises, public lands, and all other dues to the United 
States, except for duties on imports, and also for all salaries and 
other debts and demands owing by the United States to indi- 
viduals, corporations, and associations, within the United States 
except interest on the public debt and in redemption of the 
national currency." They must be redeemed in coin on demand. 
Should the bank fail, the government will redeem its jiotes, 
reimbursing itself out of the capital stock on deposit in the 
United States Treasury. 

(10) Treasury Notes of 1890. — By the Compromise Silver 
bill of July 14, 1890, provision was made for the issuance of 
treasury notes in payment for the purchase by the Secretary 
of the Treasury, from time to time, of silver to the amount of 
4,500,000 ounces each month. These notes are redeemable in 
coin on demand and are legal tender for all debts, public and 
private, except when otherwise expressly stipulated in the con- 
tract. They are receivable for customs, taxes, and all public 
dues. Most of them have been redeemed. 

(11) Federal Reserve Notes. — These are issued by the Federal 
Reserve Board for the use of the Federal Reserve Banks. They 
are based on eligible paper, bankers' acceptances, gold and gold 
certificates, and are receivable for taxes, customs, and other 
public dues. (See pp. 175, 181.) 

(12) Federal Reserve Bank Notes. — These resemble the na- 
tional bank notes, and have the same limited legal tender power. 
They are secured by bonds and short-time obligations of the 
United States. (See Pittman Act, Apr. 23, 19 18.) 

In January, 1922, the amount of money in circulation in the 
United States was $53.03 per capita. 

III. Functions of Money 

The functions of money are the following : a medium of ex- 
change, a measure of value, and a standard of deferred payments. 

Medium of Exchange. — The primary function of money is 
to serve as a medium of exchange in all kinds of commercial 



Il6 FUNCTIONS OF MONEY 

transactions. In ancient times, exchange was carried on by 
barter. Articles were interchanged for each other without 
any intermediary. This method was most cumbersome and 
would be impossible in the present state of trade. Money be- 
came the medium. A farmer who gathers in a yield of grain 
from his land, and who wishes to procure clothing for himself 
and family, transforms his grain into money by selling it in the 
market. The money acquired is given to a tailor, who in 
return gives the farmer the raiment needed. The money has 
served as a medium between farm produce and clothing. 

Measure of Value. — The second function of money is to 
serve as a measure of value for all things. All things have a 
certain value which may be estimated in terms of money, a 
money value or price. We say that a farm is worth $2000. 
The dollar is the measure of the value of the farm. In like 
manner, the foot rule or the yardstick is the measure of length, 
the quart the measure of liquid contents. 

A farmer might estimate the value of a farm in bushels of 
wheat, a cloth manufacturer in yards of cloth. But money is 
the universally accepted measure of value of the farm and of 
all things of which the value is estimated. A man's wealth is 
estimated in terms of money. A nation's wealth is estimated 
in the same way. And thus there is secured a common measure 
that may serve for comparison between the wealth of different 
men and of different nations. 

Were there no such common measure, much inconvenience 
and uncertainty would result from an attempt to compare two 
widely different substances. Since, however, we can estimate 
the values of all commodities in terms of money and have thus 
a common measure for all, it becomes easy to determine the 
quantity of one commodity equivalent to and exchangeable 
for another commodity. Instead of endeavoring to estimate 
how many yards of cloth could exchange for a ton of hay, or 
how many bushels of wheat could exchange for a coat, the value 
of each of these articles is translated into money, and at once 
their relative worth is known. 



STANDARD OF DEFERRED PAYMENTS 117 

Standard of Deferred Payments. — The third function is to 
serve as a standard by which to judge of the sum to be paid at 
the close of a long-time contract. Business transactions in- 
volving credit are concluded generally within a relatively short 
time, but there are many such credit transactions which cover 
a long period of years. Money serves as the measure of the 
amount that is to be paid over at the close of the contract. 

IV. Coinage 

Definition. — " Coinage is the act of assaying, subdividing, 
and stamping a metal intended to be used as money." (White, 
Money and Banking, p. 29.) 

The government does not certify the value of the coin, for 
that will fluctuate, according to the supply of metal in circu- 
lation, but the government stamp does certify as to the weight 
and fineness of the metal in the coin. 

Formerly in our own country coinage was carried on by pri- 
vate individuals, for example, in California, and the known 
honesty of the individuals attested the fidelity of the coinage. 
Since, however, private individuals may falsify coins, the govern- 
ments have by law reserved to themselves the right of coinage. 
Coinage was begun in the United States in 1793. There are at 
present four mints in which coinage is carried on. They are sit- 
uated in Philadelphia, New Orleans, San Francisco, and Denver. 

Coinage is said to be free when any possessor of bullion has 
the right to bring it to the mints and have it coined into money. 
Coinage of gold is free in the United States. Free coinage of 
silver existed up to 1873, but ceased in that year ; a restricted 
amount of silver was coined by the government under the 
Bland- AlHson act of 187^ and the Sherman act of 1890, but 
even this was stopped in 1893. In 1893, England stopped the 
free coinage of silver in India. In 1873, France limited the 
coinage of silver. 

Seigniorage. — Seigniorage is a prerogative assumed by the 
crown in ancient times by which it deducted for its own profit 



1 18 COINAGE 

a certain percentage of the bullion brought to the mint for coin- 
age. It is generally understood to-day to mean the charge 
made by the government to defray the actual cost of coinage. 
When the government bought silver at the market price (50 
cents or 60 cents) and coined it into silver dollars, the profit 
accruing to the government was also called seigniorage. 

''Right," ''Heavy," "Light," Money. — When the coins 
that issue from the mint have the exact weight and fineness 
'required by law, i.e. 25.8 standard grains (23.22 fine) for the 
gold dollar, and 412.5 standard grains (371.25 fine) for the silver 
dollar, such coins are said to be " right." When they have more 
grains than required, which happens generally through the in- 
advertence of the assayer, the coins are said to be " heavy." 
When, through the same inadvertence or through abrasion, 
they have not the requisite number of grains, they are said to 
be "light." 

QUESTIONS 

1. Explain barter. Does it exist to-day? What various objects were 

used as money among different nations? How did our present 
stamped coins come into use ? 

2. Why were gold and silver chosen as money? 

3. When is money legal tender? What is "lawful money" in the United 

States? What are the different kinds of money? Give examples. 

4. What are the defects of paper money? If a government were to issue 

a billion dollars' worth of paper money, would the wealth of the 
country be increased ? 

5. Wliat are the signs of an over-issue of paper money? 

, 6. Mention the kinds of money in use in the United States. 
7. What are the functions of money ? What is coinage ? What is seignicr- 
age? 



CHAPTER VI 

MONEY AND PRICES. GRESHAM'S LAW 
I. Money and Prices 

Relation between Money and Prices. — Prices are measured 
in money. Prices express a relation between the value of com- 
modities and money used as a unit of measure. Prices tell us 
how much of a commodity will exchange for a given amount of 
•money. 

Prices tell us conversely how much money will exchange for 
a given amount of the commodity. In every sale or purchase 
that is made, money buys commodities, but it is just as true 
to say that commodities buy money. The purchaser of a com- 
modity is the seller of money ; the seller of a commodity is the 
buyer of money. 

The price of a commodity will vary not only through a 
change in the value of the commodity, but also through a 
change in the unit of measurement. Thus, if a measuring unit 
is twelve inches long, any object measured by it will have a 
certain length expressed in terms of the measuring unit. The 
expressed length of the object will vary not only by increase and 
decrease of the object, but also by increase and decrease of the 
measuring unit. If the rule that serves as the measuring unit 
is only ten inches long, objects measured by it will contain a 
greater number of units of measurement than would be the case 
if the measuring unit were twelve inches long. Objects, though 
they do not really change, appear to be longer or shorter when 
reckoned in terms of the different measuring units. 

It is the same with regard to commodities. The prices of 
commodities will depend on the status of the measuring unit, 

119 



I20 MONEY AND PRICES 

money, and when we say that commodities have risen or fallen 
in price, it may be that it is the unit, money, which has changed. 

Variations in Money. — Money may vary in two ways. It 
may increase or lessen in quantity, and it may increase or lessen 
in value. 

That it may increase or lessen in quantity is evident, for gold 
and silver, the basis of all money, may be produced in greater or 
less abundance by the mines; may enter or leave a country 
through importation or exportation ; may be used in greater 
or less measure by the industrial trades that deal in gold and 
silver in various forms. Thus, in 1891, the production of gold 
in the world amounted to $130,650,000; of silver, to $177,352,- 
300. In 1 90 1, the production of gold in the world amounted 
to $260,992,900; of silver, to $223,691,300. (Stat. Abstr. 
U. S., 1912.) 

Money will increase or lessen in value, because the metals 
which constitute money have a commercial as well as a mone- 
tary property, and will depend for their value on the available 
supply of the metals, and the demand there is for them, as do 
all other commercial objects. Being commodities no less than 
steel, iron, copper, lead, they are liable to fluctuate in value 
just as any of these others. 

Laws of Prices. — Hence, the following laws affecting money 
and prices are formulated (Gide, Principles of Political Economy, 
1905 edit., p. 224): 

1. Every fluctuation in the value of money causes a propor- 
tionate inverse fluctuation in prices. This means that whenever 
money increases in value, it acquires a greater purchasing power ; 
it can command more commodities than before, and conse- 
quently commodities will diminish in price. Likewise, whenever 
money decreases in value, it will have less purchasing power; 
it can command less commodities than before, and consequently 
commodities will increase in price. 

2. Every fluctuation in the quantity of money causes a pro- 
portionate change in prices. This means that, should the quan- 
tity of money in a country increase, the value of money wil) 



SUPPLY OF MONEY I2i 

decrease and the former law will operate, so that the prices of 
commodities will rise. Should the quantity of money in a 
country decrease, more value will accrue to the money remain- 
ing, and the prices of commodities will fall. 

This second law is called the " Quantity theory of money." 

The laws might be reduced to the law of supply and demand, 
for prices depend on the value of money, and the value of money 
will depend on the supply there is of it and the demand for it. 

Supply of Money. — The supply of money consists of all the 
actual money of whatever kind employed in carrying on the 
commercial transactions of the country. 

Says Walker {Money, Trade, and Industry, p. 40): "The 
supply of money consists of the quantity in circulation, multi- 
plied into the average number of times that each piece changes 
hands in exchange for goods." 

And J. S. Mill : '' The supply of money is the quantity of it 
which people are wanting to lay out ; that is, all the money they 
have in their possession, except what they are hoarding, or at 
least keeping by them as a reserve for future contingencies. 
The supply of money, in short, is all the money in circulation 
at the time." '' Whatever be the quantity of money in the coun- 
try, only that part of it will affect prices, which goes into the 
market of commodities and is there actually exchanged against 
goods." {Political Economy, Bk. Ill, ch. VIII, §§2, 4.) 

The amount of money in circulation will depend ultimately 
on the output of the precious metals, gold and silver, from the 
mines. Gold and silver are produced like any other product, 
in order that the producers may make a profit. Just as men will 
invest their money in producing a commodity that has great 
value, and their efforts in producing will be determined by the 
rise or fall of the value of the commodity, so the producers of 
gold and silver will be influenced in producing it by the rise or 
fall in the value of the gold and silver. 

When the value of gold and silver is high, there will be more 
profit derived from its production, and consequently its produc- 
tion will increase. Mines that are worked at great expense will 



122 MONEY AND PRICES 

be run as well as those in which the expenses are less. But when 
the value of money diminishes, whether on account of the in- 
creased production or otherwise, then the profits will not be so 
great, and the most expensive mines will have to shut down. 
The result will be that the overproduction will cease and an 
equilibrium will be established. 

Demand for Money. — The demand for money is a variable 
quantity, depending on many things. A certain amount of 
money is needed in a country to carry on its commercial ex- 
changes. There is an immense amount of business done each 
day before the product, upon leaving the hands of the producer, 
reaches its natural destination, the consumer, and this business 
requires a great sum of circulating money. 

It is not necessary, however, that the amount of circulating 
money should equal the sum of commercial transfers which take 
place. Those engaged in commercial exchanges are the pro- 
ducer, the wholesale dealer, the retail dealer, and the consumer. 
Money must pass from each of these upon an exchange of goods. 
The producer receives money from the wholesale dealer in ex- 
change for his product ; the wholesale dealer receives money from 
the retail dealer ; the retail dealer from the consumer. But 
the same piece of money may do service for all these transfers. 

We might follow the course of one piece of money, for example, 
a $20 gold piece. The producer of cloth stuff employs laborers 
who work for him. He pays a certain one of his laborers a $20 
gold piece for his wages. This laborer is a consumer ; he buys 
from a retail dealer a suit of clothes, and pays him the $20 gold 
piece. The retail dealer buys his ready-made clothes from a 
wholesale dealer, and pays in part payment for the clothes he 
buys the same $20 gold piece. The wholesale dealer buys his 
cloth from the producer, and in part payment for the cloth pays 
the same $20 gold piece. When it comes back to the producer, 
he may again pay it out to the laborer, and thus the circle is be- 
gun again. Again, the producer and the dealers may have bank 
accounts, and some of the above transactions can be carried 
through by the use of the same bank check. 



DEMAND FOR MONEY 1 23 

In these ways, one piece of money may do service for many 
transactions. This is indeed what takes place in the world of 
commerce, and hence we need not be surprised to learn that the 
amount of money in circulation is much smaller than would 
seem to be required by the amount of business transacted. 

The demand for money depends on : — 

(i) Number of Middlemen. — It will be evident that the 
amount of money required by business will depend to a very 
great extent on the volume of exchange, or on the number of 
hands through which the product must pass before it comes to 
the consumer. Could all producers reach without any interme- 
diary all consumers, the amount of circulating money required 
would be much less than is required in the case where the prod- 
uct must pass through many agents before it reaches its desti- 
nation. When the volume of exchange is great, there will be a 
greater demand for money, the medium of exchange. 

(2) State of Trade. — Again, the amount of money required 
in trade will depend on the state of trade, on the rapidity with 
which money circulates. When trade is very active and busi- 
ness is very brisk, commercial transactions multiply and a 
greater amount of money will be required. 

When a community is prosperous, the consumers will possess 
more money and will desire more things and the demand for 
commodities will be greater. Producers will find ready markets 
for their products, they will increase the output of their products, 
and, in general, money w^ill circulate more rapidly, and, as pro- 
ductive energy augments, more money will be in demand. 

Every year at harvest time there is a great demand for money 
in the West and South, because of the activity attendant on 
the gathering in and moving of the crops. Usually, the demand 
is met by the Eastern banks. 

When, on the contrary, trade is slow and business dull, a 
small amount of money may serve for all business transactions 
and there will be a lessened demand for money. 

(3) Growth of Population. — The demand for money will 
depend on the growth of population. The greater or less the 



124 MONEY AND PRICES 

number of the community, the greater or less will be the volume 
of exchanges that take place. 

(4) Amount of Credit Instruments. — The demand for money 
will depend largely on the degree to which instruments of credit 
are used as substitutes for money. The amount of actual me- 
tallic money demanded by the commercial world will not be 
large, comparatively speaking, when trade transactions are 
performed by means of bank checks, bills of exchange, promis- 
sory notes, bank credits, and through the agency of banks and 
clearing houses. Only a small percentage of these transactions 
will require actual metallic money to pay the balances. 

Stringency. — At times, because of the great activity existing 
in the commercial world, or for other reasons, there is not enough 
money in circulation for the purposes of trade. There is then 
said to exist a stringency in the money market. Relief is some- 
times obtained from the government, which can deposit certain 
amounts of government money in the banks, secured by bonds, 
whence it can be readily drawn for use in commercial trans- 
actions. Relief may again be obtained by borrowing abroad, 
or by the transfer of w^ealth from poorly paying investments 
to loan money, because of the high rate of interest obtainable 
when such stringency exists. 

All the factors mentioned above must be taken into account 
in interpreting the laws of money and prices. It is necessary to 
read the laws with the condition added, that all other things 
remain equal, i.e. that the several factors mentioned do not 
influence the operation of the laws. 

The laws may be condensed into the formula : Prices vary 
inversely with the purchasing power of money. (Cf. Antoine, 
Cours d'economie sociale, p. 295 et seq.) 

Commodities and Prices. — In studying the operation of the 
laws, account must also be taken of the amount of commodities 
offered for sale. 

As money represents the demand for commodities, so com- 
modities represent the demand for money. When commodities 
increase, there is an increase in the demand for money; when 



LAWS OF PRICES ILLUSTRATED 12 5 

commodities decrease, there is a decrease in the demand for 
money. 

" The demand for money is made up of the goods offered for 
money, multipHed into the number of times these goods are 
sold and resold." (Walker, Money, Trade, and Iftdustry, 

p. 40.) 

" The demand for money consists of all the goods offered for 
sale. Every seller of goods is a buyer of money, and the goods he 
brings with him constitute his demand." (J. S. Mill, Political 
Economy, Bk. Ill, ch. VIII, § 2.) ''As the whole of the goods* 
in the market compose the demand for money, so the whole of 
the money constitutes the demand for goods. The money and 
the goods are seeking each other for the purpose of being ex- 
changed. They are reciprocally supply and demand to each 
other. It is indifferent whether, in characterizing the phe- 
nomena, we speak of the demand and supply of goods or the 
supply and the demand of money. They are equivalent expres- 
sions." (lb.) 

Prices will then vary according to the quantity of commodities 
in the market. As Mill says : " Money acts upon prices in no 
other way than by being tendered in exchange for commodities. 
The demand which influences the prices of commodities consists 
of the money offered for them." {lb., ch. XII, § 2.) 

Laws of Prices Illustrated. — The following explanation 
will perhaps show more clearly the relative variations of money, 
commodities, and prices. 



1 


Money 
Quantity Value 


Commodities 


Prices 


(a) 


+ 


same 


+ 


ib) 


+ 


» 


— 



The supply of commodities remaining the same, an increase 
in the quantity of money, represented by the + sign, will bring 
about a decrease in the value of money, indicated by the sign — , 
and the prices will rise, as shown by the + sign. When people 
have more money in hand, their desires for commodities of 
various kinds increase, and there will be a consequent greater 



126 MONEY AND PRICES 

demand for commodities, with the result that these commodities 
will rise in price. 

On the contrary, a decrease in the quantity of money will 
entail an increase in the value of money. People will restrict 
their desires, and the demand for commodities will be less, and 
the sellers will be forced to offer their goods for a less price, if 
they wish to sell them at all. 

Prices 



II 


Money 


Commodities 


(a) 


same 


+ . 


(6) 


>> 


— 



+ 

Next, consider the effect of a change in the supply of com- 
modities while the quantity of money remains the same. The 
amount of commodities may increase, owing to the fact that 
improvements in production have made it more easy to produce ; 
owing again to the fact that an increase in population is an in- 
crease of the productive capacity of a country. Wh.en this 
occurs, the sellers of commodities will have a greater amount of 
commodities on hand, and competition will cause them to sell 
their goods at lower prices. 

If the amount of commodities decreases, the prices will rise, 
because there are fewer articles to supply the demand. 

Commodities Prices 

-|- same 
<( 

If money increases in quantity and commodities increase in 
corresponding amount at the same time, there will be no varia- 
tion in the prices, as the two factors exercise influences which 
antagonize and so destroy each other. The increase of money 
would cause prices to rise, as may be seen in a former example, 
and the increase of commodities would cause prices to fall, as 
may also be seen in a former example, and the result will be that 
the prices will remain the same. 

In like manner, when money decreases and commodities at 
the same time decrease in corresponding amount, the ultimate 
effect will be to keep prices on the same level, the decrease of 



III 


Money 




Quantity Value 


(a) 


+ 


(b) 


+ 



IV 


Money 
Quantity Value 


CoMMODrrrts 


{a) 


+ 


— 


ib) 


+ 


+ 



LAWS OF PRICES ILLUSTRATED 1 27 

money, which tends to lower prices, being nullified by the de- 
crease in commodities, which tends to raise prices. 

Prices 

+ + 

It may be that the forces which affect prices may each act in 
such a manner as to have an augmented influence on prices. 

Thus, an increase of money, which tends to raise prices, may 
be accompanied by a decrease in the amount of commodities, 
which also tends to raise prices. In that case the rise in prices 
will be higher, as is indicated by the signs + + . 

Again, a decrease in money, tending as it does to lower prices, 
may be accompanied by an increase in the amount of com- 
modities, which also tends to lower prices. In that case, the 
effect will be intensified, as indicated by the signs . 

Distribution of Money. — How does the money in existence 
in the world become distributed? By price in trade. 

Suppose that ten millions of dollars of gold is produced in the 
United States. It will not remain there if it is put into cir- 
culation. Follow its course. 

Being put into circulation, it will cause prices to rise. This 
will invite imports from all outside nations, because the United 
States has become a good market to sell in. Money will ex- 
change for the imports and will leave the country. 

Gradually the amount of money wdll decrease and prices 
will fall, and the United States will no longer offer the same good 
market for imports. The amount of imports will gradually 
return to the normal. But in the meantime, the gold of the 
United States has become distributed among the nations. 

The effect of prices in the distribution of money may be 
illustrated as follows : — 

In the United States, because of the supply of money, $1 will buy 20 
pounds of a certain commodity; price of one pound = $.05. 

In England, because of a greater supply of money $1 will buy 15 pounds 
of that commodity; price of one pound = $.06.6. 



128 GRESHAM'S LAW 

In France, because of a still greater supply of money, $i will buy lo 
pounds of the same commodity; price of one pound =$.io. 

Should such a state of affairs exist, at once the Enghsh buyers 
will buy in the United States rather than in England, because 
they can get more for their money, and the French buyers will 
buy in England and in the United States rather than in France, 
for the same reason. 

On the other hand, the United States sellers will sell in Eng- 
land and better still in France rather than in the United States, 
because their goods will bring higher prices in those countries. 
At home, the United States seller will have to give 20 pounds 
for $1; in England he need give but 15 for the same $1 ; 
in France, he need give but 10 pounds for the same $1. 
Trade will tend to bring about in these countries a level of money 
supply and of prices. 

To quote from Walker {Money, Trade, and Industry, p. 43) : 
" Just as the bubble in the spirit-level runs out of sight so soon 
as the surface on which it is placed departs in the smallest degree 
from the horizontal, even before the practiced eye of the mason 
or carpenter could detect the inclination, so gold and silver com- 
mence to flow from a country where they have less purchasing 
power than in surrounding regions, before the most accomplished 
statistician or banker would be able to say that such a condition 
of prices had been reached." 

A qualification of this movement will result from the cost of 
transportation. 

11. Gre sham's Law 

Statement of Gresham's Law. — We now come to the discus- 
sion of a very important subject in connection with money. It 
is a law known by the name of Gresham's law. 
> Where a metal coin is the standard of a country, it will after 
a time come to pass that certain portions of the issue will become 
abraded and worn and consequently of less weight. This will 
not be noticed much by ordinary traders, and the coins whether 
heavy or light will continue to pass current. But there are 



HOW MONEY DISAPPEARS 1 29 

certain classes of people who take note' of this loss of weight and 
consequent loss of value of coins, and because of these people, 
after a certain time, the following fact will be observed: the 
new, bright, unworn pieces of coin will disappear from circula- 
tion, and the worn, chipped, light pieces will remain. 

Again, if the government should establish two metals as legal 
tender, gold and silver, and if the metallic value of one coin 
should be less than the metallic value of the other, the same 
phenomenon will be observed, viz., the more valuable coin will 
disappear from circulation and the less valuable coin will remain. 

Again, if the government issues paper as legal tender, irredeem- 
able notes, greenbacks, as was done in 1862 in the United States, 
it will be found that after a time the gold and silver will dis- 
appear and the paper money alone will remain in circulation. 

This fact was noticed as far back as the time of Elizabeth, 
by Sir Thomas Gresham, and by him was formulated into the 
saying : ''Bad money drives out good money, but good money 
cannot drive out bad money." The principle here expressed 
has become known as Gresham's law. 

How Money Disappears. — It may be asked : How does the 
good money disappear? Where does it go to? There are 
three modes of disappearance, — hoarding, foreign payments, 
and sale by weight. 

(i) Hoarding. — When people wish to provide against the 
future, they store away those things which have the greatest 
value. Of two gold pieces, they will select the heavier, the 
newer, the more perfect, for hoarding, while they will use the 
more worn, the lighter, for current expenses. Of gold and silver 
coins, they will hoard that which has the higher value. Of 
metal and depreciated paper they will hoard the metal. 

Employers who are inclined to hoard, will store away the 
heavier coins, or the metal money as compared to paper, and 
will pay their business debts, their employees, their household 
debts in the less valuable money. 

It is to be understood that the several kinds of money are all 
legal tender in the country. The gold dollar, the silver dollar, 

POL. ECON. — 9 



130 GRESHAM'S LAW 

the paper dollar, are each worth 100 cents. If you go to the 
market, you can get as much for the paper as you can for the 
silver dollar, as much for the silver as you can for the gold dollar. 
But the intrinsic value of each of these pieces of money may be 
very different. The 23.22 grains of gold in the gold dollar may 
be worth in weight 100 cents, but the 371.25 grains of silver in 
the silver dollar may be worth in weight but 50 cents, and the 
paper dollar may have no intrinsic value. Still each of these 
dollars may by law be made legal tender within the country. 
If one wants to hoard money, he will naturally put aside that 
kind of money which has intrinsic value rather than that which 
depends on some extrinsic factor, viz., the law of the land, which, 
as it has been made by the will of the legislator, may be again un- 
made by the same will. 

(2) Foreign Payments. — This is by far a more rapid means for 
the disappearance of good money. Foreign payments are made 
in gold specie, which passes not on its face value but by weight. 

When, therefore, payment is to be made abroad by bankers, 
commission merchants, and others who deal with foreign cou)i- 
tries, those coins which are heavier will be chosen, while the 
lighter coins will be kept at home and turned back into circu- 
lation, where they pass on their face value and are not ob- 
jected to. 

Thus, also, if the intrinsic value of a silver dollar is only 
50 cents, the silver dollar will be worth only 50 cents abroad, 
and one will not pay a foreign bill with silver dollars, since he 
would have to pay twice the amount. He will exchange his 
silver dollars for gold dollars, and with these discharge his foreign 
debt. The silver dollar is worth 100 cents at home, because 
the law makes it legal tender ; it is worth 50 cents abroad, 
because abroad only its intrinsic value is regarded. 

(3) Sale by Weight. — This has been a still more frequent 
and more rapid means for the disappearance of good money in 
countries having a bimetallic standard. 

When both gold and silver are legal tender and both are ad- 
mitted to free coinage, the values of the two kinds of money, 



HISTORICAL INSTANCES 13 1 

silver and gold, may vary relatively to each other. Gold and 
silver are metals and commercial commodities. They have a 
commercial value, which will follow, as in the case of other com- 
modities, the law of supply and demand. The 23.22 grains of 
gold contained in the gold dollar may, at one time, be worth 
one silver dollar. In that case, no profit could be made by melt- 
ing gold dollars and selling them by weight. Should, however, 
a scarcity of the gold metal occur, the value of gold would ap- 
preciate relatively to silver. The 23.22 grains in the gold 
dollar might be worth 102 cents estimated in silver, and it would 
then be profitable to melt the gold dollars and sell them by 
weight. The legal value of the gold coin remains the same, but 
its commercial value as metal has risen. The silver dollar 
would remain in circulation, the gold would disappear. 

Historical Instances. — History furnishes many instances 
of the operation of Gresham's law. Towards the close of the 
reign of Elizabeth, in 1 601, the ratio of silver and gold was 11 to i. 
In 1606, under James I, gold had risen in value, and it began 
to be exported and melted to such an extent that it became 
necessary to diminish the weight of the gold coins. The new 
ratio was 12 to i. 

In 161 2, gold again acquired greater value than silver, and 
again it began to disappear. The ratio was changed to 13 to i. 
This, however, gave silver a greater value than gold, and at once 
silver began to disappear. No new rating was made, but in 
1 6 14, a proclamation was issued prohibiting the exportation 
of the precious metals. It had no effect. Another proclama- 
tion appeared in 1618. Still no effect. In 1622 and in 1624, other 
similar proclamations follow^ed. No effect. In 1636, seven 
persons accused of melting and exporting gold were arrested 
and fined over $40,000 and imprisoned until the fines were paid. 

Nothing that the government could do could stop the dis- 
appearance of the precious metals. It was in this instance 
stopped by the gradual rise of the market price of gold until 
gold and silver were at par. 

The same trouble arose later, and as gold or silver rose in 



132 GRESHAM'S LAW 

value, it began to disappear. This fact, causing immense worry 
to England's financiers, led England finally in 1816 to adopt 
the gold standard and to debase silver into mere token money. 
Operation of Gre sham's Law. — The application of Gresham's 
law will take place in the following cases : — 

1 . When a worn metallic money is in circulation with a newly 
coined money. This was the case that brought the phenomenon 
under Gresham's notice. 

2. When a light money is in circulation with a good money, 
or a right money with a heavy money. 

3. When a depreciated paper money is in circulation with 
metallic money. Our own history furnishes many instances of 
the operation of the law in this third case. In 1820, there 
existed 307 banks which were allowed to issue bank notes. 
They did so " without regard to capital or specie holdings." 
(Hepburn, Contest for Sound Money, p. 77.) As a result, the 
country was flooded with paper money, which depreciated 
rapidly. Boston and New England notes alone were at par 
with specie. Elsewhere paper notes were discounted at rates 
varying in different years, as follows: 1814, 10 to 20 per cent: 
1815, 2 to 21 per cent; 1816, if to 23 per cent. In 1823, some 
Kentucky bank paper reached as high as 75 per cent discount. 
As a result of this depreciation of paper money, metallic money 
disappeared through hoarding, and banks were obliged to suspend 
payments. 

Again, in 1837 and following years, owing to unsatisfactory 
banking laws and the power of the banks to issue unlimited 
paper, the same result was brought about and metallic money 
was nowhere to be had. (Hepburn, lb., p. 123.) 

During the Civil War both the Confederacy and the United 
States offered instances of the withdrawal of specie due to the 
existence of depreciated paper money. (White, Money and 
Banking, p. 173.) 

The amount of paper currency in the Confederacy in 1863 
was $700,000,000. One gold dollar was worth in November 
and December, 1861, $1.10 and $1.15 in Confederate paper 



LIMITATION OF GRESHAM'S LAW 1 33 

money; in the year 1862, from $1.20 to $2.50; in 1863, from 
$3.00 to $20.00; in 1864, from $21.00 to $49.00; in April, 
1865, $100.00. These figures show the scarcity of specie, its 
almost entire disappearance from circulation. 

Somewhat similar conditions existed in the North. Several 
issues of paper notes had been made, and the volume of paper 
currency greatly increased. In December, 1861, the banks had 
102 millions of dollars in specie and 184 millions in paper notes, 
and specie payments were suspended by both the banks and the 
Treasury. Specie disappeared entirely from circulation. (Hep- 
burn, Contest for Sound Money, p. 196.) The gold dollar was 
worth $1.86 in paper money in May, 1863, and in July, 1864, 
was quoted at $2.22 to $2.50. 

Limitation of Gresham's Law. — A limitation, however, is 
to be put to the operation of Gresham's law. A certain amount 
of money is needed to effect the commercial exchanges that are 
carried on. Should too great a portion of the current money dis- 
appear, the stock of money needed for commercial purposes 
would be insufficient, and there would be a rise in the monetary 
value of the coins, bringing them to a par with the market value. 
It would thus no longer be profitable to export or to sell by 
weight, and that traffic would be arrested. 

QUESTIONS 

1. What relation do prices express? Can the values of objects remain 

the same while the prices of the objects vary? 

2. How does money vary? Give the laws of the variation of money. 

3. What constitutes the supply of money ? The demand for money ? On 

what does the demand for money depend? How much money is 
needed in a country? 

4. When does a stringency exist? 

5. How do commodities affect prices ? ' 

6. Illustrate the laws of prices by examples. 

7. How does money become distributed in the world ? Give an example. 

8. Explain Gresham's law. How does the better money disappear? 

9. Can you give any historical instances of the operation of Gresham's law ? 
10. What is the limitation to the operation of Gresham's law? Illustrate 

by an example. 



CHAPTER VII 
BIMETALLISM AND MONOMETALLISM 

Definitions. — Bimetallism is the theory that holds that two 
kinds of metal money, gold and silver, should be used as the 
money of the country, with full privilege of free coinage. 
Monometallism holds that only one metal, gold, should be used 
as the money of the country. 

The question of Bimetallism vs. Monometallism has long been 
debated in the past, and came before the whole country for 
solution in the Bryan-McKinley presidential election in 1896. 
It seems to be definitely settled in this country in favor of gold 
as the single standard. 

The low prices which obtained in the days of the silver agita- 
tion led many to urge the addition of silver to the existing gold 
medium, in order that more money should be put in circulation 
and thus cause prices to rise. But in recent years, owing to 
various causes, among which is the great production of gold, 
prices have risen considerably, and the main reason for the 
silver agitation, the alleged insufficiency of the monetary 
medium, no longer has weight. 

Kinds of Bimetallism. — Bimetallism is National when it 
has reference to a nation. It is International when it has refer- 
ence to the whole world. 

Ratio. — There exists at all times a relation between the 
absolute values of gold and silver. A certain amount of silver 
is equal in value to a certain amount of gold. This relation is 
called the ratio between gold and silver, and is usually expressed 
in ounces. Thus, 16 to i means that 16 ounces of silver are 
equal in value to i ounce of gold. 

134 



BIMETALLISM IN THE UNITED STx\TES 135 

The Legal ratio is the ratio established by law, i.e. the ratio 
which is assumed by the government as a standard when it 
coins gold and silver pieces. When the silver dollar and the 
gold dollar are coined by the government, they each contain a 
specified amount of silver or of gold. The proportion of silver 
and gold in the coined pieces is the legal ratio. 

The Market ratio or the Market value of silver and gold rela- 
tive to each other is the ratio established independently of 
the government by the conditions of the gold and silver markets. ■ 
These conditions are determined by the supply and demand of 
the metals, the output from the mines, and other factors. 

Historical Sketch of Bimetallism in the United States. — In 
1792 bimetallism (of gold and silver) was established on the 
recommendation of Alexander Hamilton, first Secretary of 
the Treasury. The ratio between silver and gold adopted by 
the government (legal ratio) was 15 to i. The gold eagle 
($10 gold piece) contained 247.5 grains of pure gold, 270 
standard grains. The silver dollar contained 371.25 grains of 
pure silver, 416 standard grains. 

The gold dollar piece was not coined until 1849. ^s the theo- 
retic standard for measuring the ratio, it would contain 24.75 
grains of pure gold. As the ratio was 15 to i, fifteen times 
24.75, the amount of pure grains in the standard gold dollar, 
gave 371.25, the amount of pure silver grains in the silver 
dollar. 

1 780-1 820. The yield of silver from Mexican mines was 
enormous. This influenced the market value of silver. The 
market value of silver fell below 15 to i, although the legal 
ratio remained at 15 to i. 

1793. The market value of silver fell below 15 to i and never 
again regained that ratio. Because of the difference existing 
between the legal ratio and the market ratio, Gresham's law be- 
gan to take effect and gold began to disappear. 

1808. The market value of silver compared to gold was 16 
to I, while the legal ratio remained 15 to i. Now the silver 
dollar was worth very much less than the gold dollar, although 



136 BIMETALLISM AND MONOMETALLISM 

exchanging as coin with the gold dollar. Ten silver dollars con- 
taining 3712.5 grains of pure silver would exchange for one 
eagle ($10 gold piece), and the one eagle would buy 3960 grains 
of pure silver in the shape of bullion at the market price. Evi- 
dently the two factors of Gresham's law, hoarding and foreign 
payments, would bring about the disappearance of gold. And 
such in fact was the case. 

1 81 7. Remedies for the disappearance of gold began to be 
suggested. 

1834. A new coinage act was passed, making the eagle 232 
fine grains and 258 standard, instead of 247.5 ^^^ ^1^^ 270 
standard, as it had been by the enactment of 1792. The object 
of the act was to lower the value of gold coin, so that it might 
not disappear. This brought the legal ratio of silver and gold 
to 16 to I, and made it equal to the market value. 

1837. A new law was passed making the eagle 232.2 fine grains 
and 258 standard, and the silver dollar 371.25 fine grains and 
412.5 standard. The coinage of both metals was made free 
and unlimited. The legal ratio was now 15.988 to i (practically 
16 to i). The market ratio of silver and gold was 15.7 to i, 
and now conditions were the reverse of what they were before : 
silver overvalued gold, and, as a result, silver began to disappear 
and gold came into circulation. Silver continued to command 
a slight premium down to the year 1874. 

1840. There was great production of gold from Russian 
mines. 

1848, 1 85 1. Gold was discovered in California and Australia. 
The result of this increase of the gold output was still further to 
depreciate gold bullion. 

Another cause which tended to separate the two metals was 
the fact that silver was at this time absorbed in vast quantities 
by India. Gold came into use and silver disappeared. Even 
the small silver coins disappeared. This was because the half 
dollar was just one half the weight of one dollar, the quarter 
dollar one quarter its weight, and the ten-cent piece one tenth 
the weight of one dollar. Thus, two half dollars, or four quarter 



BIMETALLISM IN THE UNITED STATES 137 

dollars, or ten ten-cent pieces were equal to one dollar. Hence, 
it was as profitable to melt the minor coins as the whole dollar. 
1853. To prevent the disappearance of minor coins, an act 
was passed making the half dollar equal 192! grains instead 
of 2o6i as before, leaving the legal tender value the same. 
The other smaller coins were treated in like manner. The 
effect was to depreciate the small coins, and it was no longer 
profitable to melt them. They became mere token money. 

Before 1853 — Silver dollar 412^ standard grains 

Half dollar 206^ standard grains 

Quarter dollar 103I standard grains 

Ten-cent piece 415 standard grains 

After 1853 — Silver dollar 412^ standard grains 

Half dollar 1924 standard grains 

Quarter dollar 96 1 standard grains 

Ten-cent piece 38^ standard grains 

In this year, one ounce of gold bullion was equal in value to 
15.3 ounces of silver bullion. As ihe legal ratio was i to 16, 
the bullion value of a silver dollar was more than its face value. 
It was worth 104 cents. 

1862-1879. Greenbacks came into use and drove out gold and 
silver. In 1879, specie payments were resumed. 

1873. Gold was made the single standard Feb. 12. Silver 
was demonetized. The silver dollar was no longer to be coined. 
In its place was put a trade dollar of 420 grains standard, and 
all kinds of silver money were made legal tender only to the 
amount of $5 (afterwards^ in 1879, $10) in one payment. 

1876. The trade dollar ceased to be legal tender. A silver 
panic spread over the country. The value of silver fell so that 
the market ratio of gold and silver was i to 17.75. 

Here began a rapid and constant fall of the commercial ratio 
of silver. It was attributed by silver men to the act of 1873, 
but other causes undoubtedly had an influence on the silver 
depreciation. The following are some of these causes : — 

(i) Germany adopted a gold standard (Nov. 23, 187 1). 

(2) The supply of silver increased greatly after 1872. 



138 BIMETALLISM AND MONOMETALLISM 

(3) The Latin Union (a league formed in 1865 between 
France, Belgium, Switzerland, and Italy for the uniform 
regulation of coinage in these states) restricted the free coinage 
of silver (1874). 

(4) The Latin Union ceased the coinage of silver altogether 
(1878). 

1878. The market ratio of silver and gold was 18 to i. Silver 
was remonetized by the Bland- Allison act. The old ratio of 16 
to I was adopted. The act was said to have been brought about 
by those who wanted to pay old debts in depreciated money 
and by the owners of the silver mines. The act, however, did 
not restore free coinage of silver. The government was to buy 
bullion at the rate of not more than four million and not less 
than two million dollars' worth per month and coin it into silver 
dollars. A silver dollar of 41 2 J grains standard was provided 
for at the ratio of 16 to i. These silver dollars were to be 
legal tender for all amounts. Silver certificates might be issued 
for silver dollars. The act provided for the calling of a Congress 
of Nations to discuss the money question. 

The effects produced by the coinage of silver as proposed and 
made obligatory by the Bland- Allison act were, that gold began 
to disappear, prices rose, there was depletion of the gold in the 
Treasury, and danger that the country would soon come to a 
silver basis. Efforts were frequently made to stop the coinage 
of silver, but without avail. 

1887. The bulUon value of the silver dollar was 75 cents, 
and the market ratio stood i to 21.1. 

1889. The ratio was i to 22.1. The silver dollar was worth 
72 cents. 

1890. The Sherman act was passed, stopping the compulsory 
coinage of silver at the rate of at least two million dollars' worth 
each month, but causing silver bullion to be purchased at the 
market value to the amount of four and one half million ounces 
per month, for which Treasury notes were to be issued. It 
was optional with the government to coin any portion of the 
silver thus secured. 



BIMETALLISM IN THE UNITED STATES 



^39 



1893. The result of the law of 1890 and of the constant 
agitation of silver men to secure the free coinage of silver, was 
that the outside world began to lose faith in the United States, 
and much gold was exported from the country through the 
liquidation of American securities. The gold of the country 
was fast disappearing. Between 1890 and 1893, $150,000,000 
in gold was exported, although commercial exports were greater 
than imports. The Treasury gold reserve in April fell below the 
$100,000,000 mark, which was held to be the danger mark. In 
President Cleveland's message to Congress, assembled in extra 
session in August, 1893, he pointed out that in three years the 
Treasury had lost $132,000,000 of gold and gained $147,000,000 
of silver. If this continued, the country would soon come to a 
silver basis. 

In November of this year, the purchasing section of the 1890 
act was repealed. The feeling throughout the country was so 
unsettled, however, that fear of disaster fell upon every section, 
and while the actual supply of money was $24 per capita, a 
money panic existed and there was no money in sight. There 
were 15,000 failures, aggregating $347,000,000; 573 banks 
and trust companies suspended; bank deposits were reduced 
$36,000,000. 

England closed the mints of India to free coinage of silver. 

Silver fell to 78 cents per ounce (par = $1.29 per ounce), 
and the ratio was i to 26.49. 

1894-1895. The drainage of gold continued throughout 
these years, and the Treasury reserve was maintained only by 
' the frequent issue of long-time bonds. 

1896. Then came the gold-silver campaign of 1896. Mc- 
Kinley was the presidential nominee of the gold men, Bryan 
of the silver men. It was a battle between Monometallism and 
Bimetallism. The popular vote was: McKinley, 7,106,779; 
Bryan, 6,502,925. McKinley was elected. He had pledged 
himself to a gold standard. The uncertainty which had ex- 
isted among business men disappeared. The tariff brought 
money into the TreasTiry, and prosperity was reestablished. 



I40 BIMETALLISM AND, MONOMETALLISM 

1900. An act was passed (March 14 ) declaring the gold 
dollar the standard unit of value, and afl&rming the intention 
of the government to maintain all other forms of money at a 
parity with this standard. 

Since 1900 there has been continued increase in the produc- 
tion of gold. Prices have risen in consequence. This fact de- 
prived the Bimetallists of one of their main arguments, viz., that 
the demonetization of silver reduced the supply of money and 
brought about a fall in prices, to the detriment of all productive 
industries. 

Such is a rapid sketch of bimetallism in the United States. 

Nearly all the countries of the world have adopted the single 
gold standard. In many countries silver circulates as money, 
but it is as subsidiary coin reduced to mere token money. 

The contest over bimetallism was fought for long years and 
with considerable bitterness. The popular vote in the election 
that sounded the death knell of bimetallism shows how nearly 
equally divided the country stood on the subject. 

The following are the main arguments advanced by the op- 
posing parties. 

Arguments of the Bimetallists. — i. Demonetization of 
silver deprived the people of one half the money available for 
productive purposes. 2. The contraction of money through 
the cutting off of silver was responsible for the downward trend 
of prices that occurred throughout the country after 1873. 
3. An injustice was done to debtors who had to make payments 
on long-term contracts, through the appreciation of gold re- 
sulting from the smaller amount of money left in circulation 
upon the demonetization of silver. 4. Two standards as a 
measure of value are better than one. They would exert a 
mutually beneficial effect, and the fluctuations in the value of 
silver and gold would counterbalance each other. History was 
appealed to in order to show that from the year 1687 to the year 
1873 the commercial ratio of gold and silver was never lower 
than I to 14.14 and never higher than i to 16.25. It was only 
after 1873 that any considerable change occurred in the ratio. 



ARGUMENTS 



141 



5. The United States should make use of the great amount of 
silver produced by the country and should take the lead in estab- 
lishing free coinage of silver. 

Arguments of the Monometallists. — The monometallists 
answered these arguments as follows : i . The money needful 
for production was not materially decreased by the demoneti- 
zation of silver. There was no falling off in the amount of 
money in circulation, as could be seen in the tables of statistics. 
Moreover, the growing use of instruments of credit had added 
to the medium of exchange. 2. The fall of prices that followed 
upon the demonetization of silver was due not so much to that 
fact as to the improved methods of production. 3. The debtors 
who might suffer through appreciated money were also con- 
sumers and had to pay less for commodities. 4. The theory 
of two standards was a delusion. There never was but one 
standard even under legalized bimetallism, and that standard 
was the cheaper metal. Our own and English experiences 
in the past were quoted as supplying facts in proof. 5. Europe 
would not follow the example of the United States should the 
United States adopt a bimetallic policy. Moreover, the present 
amount of money is sufficient for all commercial purposes, and 
there is no need of utilizing the silver produced in the country. 
This argument has been substantiated in recent years by the 
great increase of gold and the gradual rise in prices. 

The prediction so loudly made by the advocates of silver 
upon the consummation of the so-called " crime of '73," that 
the country was rushing to its ruin, has fortunately not been 
fulfilled, and the question of national bimetallism has ceased to 
be of general interest. It is claimed, however, by many who 
would not advocate national bimetallism, that if by interna- 
tional agreement the principal nations should adopt the double 
standard, many advantages would follow from its adoption. 
Yet, gold monometallists point to the failure of every effort to 
secure any concerted action in this matter on the part of the 
principal nations. The international conferences of 2878, of 
1 88 1, of 1892, had no practical results. 



142 BIMETALLISM AND MONOMETALLISM 

QUESTIONS 

1. What is bimetallism? Monometallism? 

2. What are the kinds of bimetallism? 

3. What is ratio? Legal ratio? Market ratio? 

4. Give a short historical sketch of bimetallism in the United States. 

5. What economic law is brought into prominence in the course of the 

historical sketch ? 

6. What were the main arguments used by the bimetallists ? By the 

monometallists ? 



CHAPTER VIII 

INFLATION AND CONTRACTION. DEPRECIATION. 
MULTIPLE TENDER 

I. Inflation and Contraction 

Inflation. — As has already been mentioned, a certain amount 
of money is needed in a state to carry on all its commercial 
transactions. There should be no more and no less than is 
needed for this purpose. But it may happen that the amount 
of money in circulation will be far greater than is needed for 
commercial exchanges. In that case there will be inflation and 
inflated prices. 

The value of money depending inversely on the supply, when 
the supply is greater than needed, the value of money will de- 
crease, and, as a consequence, the prices of commodities will 
rise. 

This increase of the amount of money beyond the commercial 
need may happen in various ways : — 

1. There may be an increased output of gold and silver from 
the mines; the metal so mined may be coined by the govern- 
ment and thrown into circulation. 

2. The government may give legal tender power to silver 
coins, coined at a ratio that gives them a smaller bullion value 
than gold coins. Much of our silver money has been coined 
under such conditions. The silver dollar has 371.25 grains of 
pure silver, worth by weight about 50 cents. The government 
can buy for about 50 cents 371.25 grains of silver and 
coin it into a silver dollar having the legal tender value 
of 100 cents. The government makes nearly 50 cents on 

143 



144 INFLATION AND CONTRACTION 

each dollar. The temptation for a government to make such 
profits from its mints has sometimes been very great, and when 
the government yields to the temptation and does so, it may 
overstock the money market. The result will be inflation, a 
depreciation of money, and a rap'd rise in prices. 

3. Again, the government may issue paper money and give 
it legal tender power. This was done by the United States 
during the Civil War. One issue of " greenbacks " succeeded 
another, until the amount of paper money on the market was 
enormous, with the result that a paper dollar was worth only 
about 50 cents, as compared to gold. There was inflation, and 
there resulted the high prices of the war time. 

4. Trade depression may follow on a period of commercial 
activity, and the stock of money may be greater than is needed. 

Inflation always works injustice to creditors on long-term con- 
tracts, whereas it is advantageous to debtors. Thus, if Smith 
owes Brown $1000 in i860, said amount to be paid five years 
later. Smith may discharge his debt in 1865 by the payment of 
1000 paper dollars, since they are legal tender. But Brown prac- 
tically receives but $500, because of the depreciated value of 
the paper dollar, equal to but one half the value of the dollar 
at the time the debt w^as contracted. 

Contraction. — When there is less money in circulation than 
is needed for the commercial exchanges of the country, there is 
contraction. This may also be brought about through various 
causes : — 

I. The output from the gold and silver mines may be reduced. 

"2. A certain amount of coin and buUion is lost through acci- 
dent and abrasion, and the stock may not be replenished. 

3. Commercial activity may increase proportionately more 
than the increase of money. 

The eifect of each of these causes may be that there will be 
less money in circulation than is needed. The scarcity of money 
will produce an appreciation of money, i.e. money will have 
more value. The result will be a fall in prices. 

Just as inflation works injustice to the creditor class, so con- 



EFFECTS ON PRODUCTIVE INDUSTRIES 145 

traction will work injustice to the debtor class in long-term con- 
tracts. Thus, if Smith owes Brown $1000, a debt entered into 
before contraction, and pays him in the appreciated money of 
the period of contraction, he practically pays more than the 
amount originally called for. 

Effects on Productive Industries. — The variation in money 
values has an important effect on productive industries. A 
great part of the money invested in business is borrowed capital. 
If a contraction is foreseen, producers will refuse to borrow, be- 
cause of the greater amount they will have to pay their creditors, 
or, if they do borrow, they will be forced to produce a greater 
amount of commodities in order to be able to pay their debts. 
All this will have the effect of restricting production. 

Our history furnishes an instance of contraction in the years 
1873-1879. It was due principally to the endeavor of the 
government to pay off the principal of the debt incurred in the 
Civil War. Between 1869 and 1873, bonds to the value of 
hundreds of millions of dollars were redeemed. " When the 
crop-moving period came, a sharp stringency in money mani- 
fested itself, a severe panic involving a large number of impor- 
tant concerns and spreading over the entire country followed." 
(Hepburn, Contest for Sound Money, p. 221.) 

In this instance, contraction '' brought a period of falling 
prices extending over all sorts of commodities, and continuing 
almost uninterruptedly for seven years, with the effect of 
checking production and causing apprehension and great cau- 
tion, with frequent closing of large factories and workshops, 
some suffering, and much agitation among wage earners." 
(Denslow, Principles of Economic Philosophy, p. 390.) 

While some claim that inflation and a rise in prices will prove 
beneficial to productive industries, because there will be a 
greater amount of money for investment, yet it must be observed 
that rising prices have the effect of stimulating speculation. 
New enterprises will be estabhshed, some wisely, some unwisely. 
There will be overproduction of certain commodities. Busi- 
ness failures result. Failures are a necessary concomitant of 

POL. ECON. — 10 



146 



INFLATION AND CONTRACTION 



commercial enterprises, but inflation intensifies the forces which 
tend to bring them about. 

The following table gives the commercial failures that oc- 
curred in the United States since 1899 : — 



Year 



1899 
1900 
1901 
1902 
1903 
1904 

1905 
1906 
1907 
1908 
1909 
1910 
1911 
1912 



Failures 



9,337 


90,879,889 


10,774 


138,495,673 


11,002 


113,092,376 


11,615 


117,476,769 


12,069 


155,444,185 


12,199 


144,202,311 


11,520 


102,676,172 


10,682 


119,201,515 


11,725 


197,385,225 


15,690 


222,315,684 


12,924 


154,603,465 


12,652 


201,757,097 


13,441 


191,061,665 


15,452 


203,117,391 



Llabilities 



(Statistical Abstract of U. S. Dep't Com. & Labor, 191 2, p. 705.) 



Crises. — Inflation and contraction may be the causes of 
financial crises. A financial crisis is a violent state of unrest in 
a financial center, causing restriction of credit, and the failure 
of merchants and bankers. The financial crisis that occurred 
in the United States in 1837 and that also of 1857 were due to 
inflation of the currency through the immense issues of state 
bank notes. These notes became greatly depreciated in value, 
as we have already seen. The effects produced in both crises 
were great prostration of business, the cessation of manufactures 
and agriculture, and much suffering among the laboring classes. 
(Cf. Denslow, Principles of Economic Philosophy, pp. 382, 385.) 

The crisis of 1873 was due to contraction. Says Denslow 
(p. 390) , in speaking of this crisis : ' ' The causes were national, 
and grew out of a large contraction in the volume of transferable 



REMEDY IN LONG-TERM CONTRACTS 147 

credits, occasioned partly by the policy of rapidly paying off the 
principal of the United States war debt, and partly by the fall 
in the value of silver relatively to gold, which set in in 1873, and 
culminated in the spring of 1876." 

The crises of 1893 and of 1907 were also due to contraction. 
The former was brought about by the disappearance of gold 
from the country through the disturbing influence of the silver 
agitation. The latter was brought on by many remote causes, 
all no doubt affecting the situation in various degrees, but the 
immediate causes were the withdrawal of deposits, the hoarding 
of money, the inability of banks to continue bank credits, and 
the inelasticity of the currency system in use. 

Remedy in Long-Term Contracts. — To remedy the evils 
to creditors and debtors resulting from the fluctuation of the 
monetary value, several plans have been suggested. Two of 
them are as follows : — 

1. The government should so regulate the amount of money 
in circulation that there would be a general level of prices. 

2. The contracts should stipulate that the amount of money 
called for shall be determined by the value of money at the time 
of payment, and shall be greater or less according as there is 
a depreciation or an appreciation of money. The fact of de- 
preciation or appreciation will be found by taking the sum of 
the prices of one hundred different commodities at the time of 
making the contract and of payment, comparing the two sums, 
and arriving at a tabular unit. This plan is more fully stated 

on pages 157-158- 

Some believe that the difficulty would be obviated if some 
staple which does not vary in value as much as money should 
be taken as the standard in which to pay long-term contracts. 
Such a staple is grain. The fluctuations in the price of grain 
have been much less than the fluctuations of gold and silver 
during the past centuries. As a matter of fact, Oxford Uni- 
versity for centuries has received and does still receive its rental 
from its lands in grain valuation. Hitherto no plan has actually 
been adopted. 



148 DEPRECIATION OF MONEY 

II. Depreciation of Money 

Explanation of Depreciation. — It will be interesting to devote 
some time to the study of the historical course through which 
the precious metals have passed from the pre-Christian period 
down to our own times. Through this inquiry, we shall be the 
better brought to understand the relation that exists between 
metallic money and prices. 

Gold and silver are not the only metals that could serve as a 
measure of value. Platinum has many qualities which render 
it suitable for a money metal, and between 1828 and 1845 the 
Emperor of Russia sought to introduce it into use. But the 
plans were found to be impracticable, because of the difficulty 
of turning platinum coin into ingots and platinum ingots into 
coin as might be required by exchange. (Walker, Money, Trade, 
and Industry, p. 24.) 

Radium might be taken as a measure of value. A definite 
weight of radium would have an enormously greater purchasing 
power than a like weight of gold. To-day an ounce of radium 
is estimated at a value of some hundreds of thousands of dollars. 
The reason of this value is the scarcity of the metal and the 
extrerne difficulty of producing^ it. If we were to calculate the 
value of all commodities in radium, all commodities would have 
a certain value far inferior to their present* value as estimated 
in gold. An article worth an ounce of gold would be worth only 
a small fraction of an ounce of radium. But we can conceive 
that the production of radium could be made more easy, and 
that the amount of the metal in existence might be increased. 
As its amount increased, there would be a change in the relative 
values of all commodities when estimated in radium value. The 
greater the supply of the metal, the less value an ounce of it 
would have, and the fewer units of any commodity it would 
purchase. Its purchasing power would be less. 

The same may be conceived of diamonds. These, because of 
their relative scarcity and the difficulty of procuring them, 
might be made the measure of all values, and all things might 



HISTORICAL SKETCH OF THE PRECIOUS METALS 149 

be computed in diamond value. But, if diamonds should 
increase in number, if some process were found by which they 
might be produced in great abundance, it is clear that the value 
of diamonds would decrease, and the value of all other things 
rated in diamond value would increase. 

Now, what would occur in these imaginary but readily con- 
ceivable cases of radium and diamonds, is what really has oc- 
curred in the case of gold and silver, the actual standards of 
prices for many hundred years. This will become evident by 
a rapid survey of the history of the precious metals. 

Historical Sketch of the Precious Metals. — The amount of 
precious metals in the world at the period of the Roman Empire 
was very great. In the third and fourth centuries before the 
Christian era, " more gold and silver were in the hands of men 
than all Europe possessed at the beginning of the eighteenth 
century after Christ." (Walker, Money, Trade, and Industry, 
p. 107.) 

This fact is explained by the manner in which gold and silver 
were acquired. Mines were owned by the sovereigns, and they 
were worked solely for the benefit of the sovereigns. The 
mining class was composed of slaves, who formed so numerous 
a part of the various peoples at that time, of convicts, and of 
captives taken in war. 

The immense masses of precious metals produced by these 
laborers were at first stored aw^ay in the treasuries of the 
princes, to be dispensed by them as gifts and largesses to whom 
they liked, and thus gradually to find their way into circulation 
among the people. 

Again, another great source of the metals existed in the right 
of the victor in war to carry off all the wealth he could lay his 
hands on, and history furnishes countless instances of great 
treasures in gold and silver that passed into the possession of 
the successful invader. Alexander seized at Persepolis, accord- 
ing to Diodorus, treasure to the value of $135,000,000. Every 
Roman triumph was graced by the display of gold and silver 
wealth obtained in conquest. 



150 DEPRECIATION OF MONEY 

As Rome finally became the mistress of the world, much of 
the wealth of the world naturally found its way to the Roman 
capital. Hence, the wealth of Rome became enormous. Gold 
and silver flowed like streams in Roman streets. 

Under Roman rule, however, the working of the mines was 
carried on in a haphazard, reckless, wasteful way, and the pro- 
duction of gold and silver declined. The mines were leased out 
to " farmers," who worked them for their own advantage, 
using every endeavor to enrich themselves as much as possible 
in the brief period during which they held possession. Only 
the best ores were taken out, and the mines were left in a de- 
plorable condition for succeeding workers. (Cf . Walker, Money, 
Trade, and Industry, p. 112.) 

In the fifth century, the vast hordes of Teutons swept down 
upon the Roman Empire, and that great fabric tottered and fell. 
One of the first effects of these invasions was to cut off the supply 
of precious metals from the mines, and ultimately to destroy 
almost wholly the art of mining, of which the barbarian in- 
vaders were ignorant. The mines fell into disuse, and mining 
practically ceased throughout the Roman Empire. The use of 
gold and silver gradually ceased, the existing stock of the metals 
becoming exhausted, and there set in the great famine in the 
precious metals which lasted until the close of the Middle Ages. 

Alison, the historian, has an interesting passage showing his 
belief in the connection between the fall of the Roman Empire 
and the withdrawal of gold and silver from circulation. He says : 
" The fall of the Roman Empire, so long ascribed, in ignorance, 
to slavery, heathenism, and moral corruption, was in reality 
brought about by the decline in the gold and silver mines of 
Spain and Greece, from which the precious metals for the cir- 
culation of the world were drawn at the very time when the 
victories of the legions and the wisdom of the Antonines had 
given peace and security, and with it increase in numbers and 
riches, to the Roman Empire." (In Walker, lb., p. 114.) 

Upon this passage of Alison, Walker remarks : " Doubtless 
this claim is far too large. Causes distinctly political and social 



WORLD'S PRODUCTION OF GOLD AND SILVER 151 

had to do with the downfall of that mighty fabric of military 
enterprise, legislative wisdom, and administrative skill ; but it 
seems to me that there cannot be an intelligent doubt that the 
steady rise in the value of money, due to its increasing scarcity, 
contributed greatly to the impoverishment of the people, the 
decay of commercial enterprise, and the abandonment of agri- 
cultural lands, which sapped the foundations of the Roman 
Empire." (Walker, Ih.) 

The mining of the precious metals practically ceased in the 
world until towards the end of the Middle Ages, when it was taken 
up in Austria, Hungary, and Germany. Prices were at a low 
level. 

Then came the discovery of America, and in 1545 the South 
American mines began to pour into Europe a vast amount of 
silver, and, as it came into circulation, gradually prices rose. 

After the year 1700, the gold mines of Brazil began to add to 
the stock of money, and later in the same century Mexico added 
still more from its silver mines, so that from 1600 to 1800 prices 
rose three or four hundred per cent. 

In 1848, gold was discovered in Cahfornia, in 185 1 in AustraHa; 
and still greater amounts of gold were poured into circulation, 
still further affecting prices. 

Thus gradually the precious metals, through this increase 
in their quantity, have depreciated in value, and lessened per- 
ceptibly in their purchasing power, and the values of all things 
estimated in money have as gradually risen. 

World's Production of Gold and Silver. — While, in 1800, 
the average annual world's production of gold was 571,000 
ounces, in i860, the average annual production amounted to 
about 6,500,000 ounces. Since that time the annual production 
of gold and silver has been very great. Of late years, the new 
and improved methods adopted in mining have reduced the cost 
of production and have helped towards the increased output 
of the metals. 

The following tables will show the world's production of gold 
and silver : — 



152 



DEPRECIATION OF MONEY 



WORLD'S PRODUCTION OF GOLD 









Ounces 


Value 


Average Annual Production 














Ounces 


Value 


I86I-I870 . . 


61,098,340 


$1,263,015,000 


6,109,834 


$126,301,500 


I87I-I880 






51,643,149 


1,067,559,600 


5,164,315 


106,755,960 


I88I-I890 






52,005,568 


1,075,050,500 


5,200,557 


107,505,050 


I89I-I900 






101,647,521 


2,101,240,900 


10,164,752 


210,124,090 


I90I-I9IO 






182,892,523 


3,780,364,000 


18,289,252 


378,036,400 


I9II 






22,348,313 


461,980,500 






I9I2 






22,549,335 


466,136,100 






I9I3 






22,249,596 


459,939,900 






I9I4 






21,240,416 


439,078,260 






I9I5 






22,674,568 


468,724,918 






I9I6 






21,970,788 


454,176,500 






I9I7 






20,289,546 


419,422,100 






I9I8 






18,556,920 


383,605,552 






I9I9 






17,664,910 


365,166,077 







(Stat. Abstr. U. S., 1920, p. 823.) 



WORLD'S PRODUCTION OF SILVER 









Average Annual Production 




Ounces 


Coining Value 


Ounces 


Coining Value 


I86I-I870 . . 


392,267,775 


$507,175,000 


39,226,778 


%o,7i7,5oo 


I87I-I880 






660,460,975 


853,928,500 


66,046,098 


85,392,850 


I88I-I890 






972,402,901 


1,257,248,200 


97,240,290 


125,724,820 


I89I-I900 






1,616,673,178 


2,089,856,000 


161,667,318 


208,985,600 


I90I-I9IO 






1,826,226,572 


2,361,181,800 


182,622,657 


236,118,180 


I9II 






226,192,923 


292,451,500 






I9I2 






224,310,654 


290,017,800 






I9I3 






223,907,843 


289,497,000 






I9I4 






168,452,942 


217,797,743 






I9I5 






184,204,745 


238,163,710 






I9I6 






168,843,000 


218,302,060 






I9I7 






174,187,800 


225,212,509 






I9I8 






198,168,408 


256,217,739 






I9I9 






174,517,414 


225,638,677 







(Stat. Abstr. U. S., 1920, p. 823.) 



EFFECT OF DEPRECIATION ON SOCIETY 153 

From all that has been said, it will be gathered that there has 
been an enormous increase in the precious metals, with the result 
that money has considerably depreciated. With the access of 
the metals, their value has diminished, and consequently prices 
in general have risen. 

Money had a far higher purchasing power in past centuries, 
and with every increase of the metals, their purchasing power 
has lessened. And the prospect is that this depreciation of 
money will go on indefinitely. New mines will be opened, new 
stores of the metals will be discovered, and the demand, al- 
though increased by the growth of population and the extension 
of exchange, will not keep pace with the supply. 

Effect of Depreciation on Society. — Now, it may be asked : 
Is this constant depreciation of money a benefit or an evil ? 

To many economists it appears in the light of a benefit to 
society, because the good effects resulting from depreciation 
reach directly that large portion of society which is engaged in 
production and indirectly all the consumers as well, while the 
evils of depreciation develop only by the slow process of the 
evolution of economic laws. (Cf. Walker, Money, Trade, and 
Industry, p. 79. Cf. Denslow, Principles of Economic Phi- 
losophy, p. 360.) 

There can be no doubt that a rise in prices has the effect of 
giving a stimulus to production. New enterprises are entered 
into, more capital is invested in existing and new projects, 
money that is tied up in bonds and other investments which pay 
comparatively small interest will preferably be invested in 
business ventures where the profits are greater. 

The increase of productive industries brings about a greater 
demand for labor, and results in the betterment of the wage- 
earning portion of society. The rate of interest on money is 
reduced, because of the abundance of money obtainable on 
demand. The burden of taxes is diminished, at least in so far 
as taxes go to pay the interest or principal of public debts. 

A new impetus is given to business. There is in every com- 
munity an ever-watchful class who are intent on employing 



154 DEPRECIATION OF MONEY 

every scheme for the increase of wealth. As Newmarch has it : 
" There is at all times a profusion of enterprises to be under- 
taken, of experiments to be tried, of schemes to be worked out, 
of improvements to be made, of ingenious men to be set up with 
capital, of trade already profitable to be made more so by vast 
extensions." (In Walker, Money, Trade, and Industry, p. 85.) 

Now, there are three classes of society which help onward the 
great tide of production: the capitalist, who furnishes the capital; 
the laborer, who furnishes the labor ; and the business man or 
promoter or captain of industry. 

It is the last mentioned who, possessed of technical skill, 
directive and administrative ability, and commercial knowledge, 
puts the capital to its best use and employs the labor of the 
workman to the greatest profit. 

The man of business is incited to an increase of energy by the 
hope of profits, and this hope of profits exists when there is a 
rise in prices, consequent on the increased supply and the ac- 
companying depreciation of money. 

It may be said that the prices of all articles employed in pro- 
duction will rise together with the rise of the prices of products, 
and hence the profits of the producers will not be appreciably 
increased. But it must be observed that the rise in prices is not 
spontaneous throughout, nor will it reach the raw materials of 
production until some time has elapsed. In the meantime, the 
chance to make increased profits exists and will be incentive 
enough to the producers to induce them to apply themselves 
with greater activity to production. (Cf. Walker, Money, Trade, 
and Industry, p. 97.) 

Finally, the depreciation of money and the rise in prices is 
favorable to the whole debtor class. All who owe debts may 
pay their debts in the depreciated money and thus have re- 
mitted a portion of their indebtedness. The creditor class will 
suffer, and this class embraces a great portion of society. 

As Walker says, the creditor class is composed of all " owners 
of capital who are not also employers of labor." And he pro- 
ceeds to enumerate the several members of the class : — 



EFFECT OF DEPRECIATION ON SOCIETY 155 

1. Those who by age, sex, or infirmity are disabled from 
active occupation ; retired business men ; pensioners, annui- 
tants. 

2. Those who Hve on their incomes. 

3. Professional men who are not engaged in commercial 
business. 

4. The laboring class in so far as they save and deposit their 
savings in banks. 

All these are capitalists in the broad sense of the word, and 
rank as creditors, together with those who are owed money 
by others for commercial goods transferred. These creditors 
furnish much of the capital that is used in business. Returns 
must be made to them for the use of this capital by those who 
form the great debtor class of society, viz., the business men 
who are the employers of labor. These returns, which form the 
revenues of the capitalist class, will be decreased by the depre- 
ciation of money, whereas the business men, the debtors, find 
their debts lessened by the same cause. 

The reasons advanced by those who regard this fact as a boon 
to society in general are various. 

The capitalist class is better able to suffer the loss than others. 

Those who belong to that class should feel that they are 
parasites, and should endeavor to take a more active part in 
the upbuilding of the prosperity of their country. (Cf. Gide, 
Principles of Political Economy, p. 231.) 

It is not right that the present generation, the debtors, should 
bear all the undiminished claims of the past, the creditors. 

When it is asserted, then, that the creditor class will suffer 
by this depreciation of money, and that they will receive but 
a portion of what is justly their due, it may be pointed out that 
the depreciation, as it has been under discussion, is brought about 
not by any act of government, " not by confiscation and re- 
pudiation, the work of man, carrying with it the sting of in- 
justice, and bringing retribution after it, but by a purely natural 
process, in the discovery of new stores of the precious metals, 
or through improvements in the chemical and mechanical arts 



156 DEPRECIATION OF MONEY 

of mining." (Chevalier, in Walker, Money ^ Trade, and In- 
dustry, p. 96.) It is brought about by natural causes, having 
influence on prices similar to the influence on business exerted 
by the introduction of machinery, by the opening up of new 
markets, and other such causes which form part of the onward 
progress of mankind in commercial pursuits. Moreover, the 
causes in the present instance work only very gradually, and ex- 
tend their operation over long periods of time, and thus pro- 
duce their effect without any very sudden or severe shock. 

Instances in History of Great Increase of Money. — There 
have been two instances in history of a great inflow of the pre- 
cious metals on the world, with a consequent notable depre- 
ciation in the value of money and a rise in prices. 

The first took place in Europe in 15 70-1 640, upon the dis- 
covery of the New World, w^hen vast silver mines were found in 
South America. It tgok some time before the metal, shipped 
by way of Spain, could reach the marts of Europe and be dis- 
tributed so as to exert an influence on trade and prices. The 
effects of this flood of metallic money upon the world were very 
great, because of the small amount of money then in existence. 
The evils of depreciation were intensified because of the sud- 
denness and the greatness of the increase of money. But the 
beneficial effects were no less marked. New life and energy 
were injected into the cultivation of land by the prospect of 
the gain the higher prices afforded. Productive industries 
awoke from the lethargy in which they had long reposed. The 
maritime power of England sprang into existence, oriental trade 
expanded, and the whole of society received a new impetus that 
was to carry it far in commercial development. (Cf. Walker, 
Money, Trade, and Industry, p. 102.) 

The second instance was the discovery of gold in California 
and Australia, in the years 1848 and 185 1 respectively. This 
increase of money did not produce so marked a change as did 
the former, because the amount of existing money was already 
great, and the new increase, though large, produced but a com- 
paratively slight effect. 



MONEY AS A STANDARD OF DEFERRED PAYMENTS 157 

III. Multiple Tender 

Money as a Standard of Deferred Payments. — The question 
just discussed will make manifest the inherent defect of the 
precious metals as money. As we have seen, there are three 
functions of money. It serves as a medium of exchange, a 
measure of value, and a standard of deferred payments. 

While the metals perform well the first two functions, they 
fulfill but very inadequately the third function, viz., that of 
serving as a standard of deferred payments. 

A person who receives $1000 in i860, and cancels his debt in 
1900 by paying $1000 in the lawful money of the country, does 
not pay to his creditor the full value of the money he received in 
i860. The purchasing power of the $1000 is not the same in 
1900 as it was in i860, because of the depreciation money has 
undergone during the intervening forty years. 

The creditor is made to suffer great hardship by this change- 
ableness in the value of money. One can easily see what a loss 
would be suffered by a creditor who in 1560 had loaned $100, 
and at the end of twenty years received back merely his $100 
in metal money. In the interim, metallic money had depre- 
ciated nearly two thirds in value. 

To come nearer our own times, it has been computed by 
Stanley Jevons that the value of gold fell 46 per cent between 
1789 and 1809 ; from 1809 to 1849 it rose 145 per cent, and be- 
tween 1849 ^i^d 1S74 it fell again at least 20 per cent. (Walker, 
Money, Trade, and Industry, p. 68.) Contracts extending over 
such periods would, it is evident, be very materially affected by 
these fluctuations in money value. 

Remedy Proposed : Multiple Tender. — No remedy has yet 
been adopted to avoid the undeserved losses which result from 
the changes in the value of the precious metals through long 
periods of time. A scheme suggested by Lowe and Scrope in 
England, and Count Soden and Professor Roscher in Germany, 
would, in the opinion of such men as Jevons and Walker, prove 
satisfactory in long-term contracts. 



158 MULTIPLE TENDER 

It consists in taking, at the two moments of making and 
settling the contracts, the sum of the prices of a large number 
of articles of general consumption and of general necessity for 
life. The sum taken at the first moment, that of making the 
contract, would furnish a first unit. The sum taken at the 
second moment, that of settling the contract, would furnish 
a second unit. These Units will represent the value of money 
at the two periods. 

Thus, the articles selected may sum up $10 at the first period ; 
the same articles may sum up $12 at the second period. The 
figures 10 and 12 are the tabular units of the two periods. Now, 
suppose a parcel of land was bought at the first period at a price 
of $6000. This would mean 600 units. When the second period 
had come and payment was to be made, the tabular unit is 
found to be 12, and 600 times this unit will make $7200, the 
creditor's price for the land at the moment of payment. 

This method could be carried out if the government would 
appoint commissioners to make up the tabular units at the dif- 
ferent periods. It would prove too cumbersome if applied to 
short periods of not more than three months' duration, as Jevons 
would have it applied, but if, as Walker recommends, it were 
applied to comparatively long periods, it would do away with 
a great amount of injustice unwittingly done to-day to the 
creditor class through the depreciation of money values. 

Walker says : " In the permanent investments of property not 
the least inconvenience would be encountered by the scheme of 
a Multiple Tender, which might be extended to the cases of all 
who have definitely retired from active life, carrying away with 
them all they will ever have to support old age and provide for 
their children ; to the cases of trustees and guardians, under a 
solemn responsibility in the care of estates, where loss is more 
to be dreaded than gain to be desired ; to the cases of institutions 
whose funds are sequestered from the stock of active capital for 
pious and charitable uses. The funds of savings banks might be 
put under the same safeguard, and government loans might also 
be issued in terms of the Multiple Tender." {Ih., p. 76.) 



QUESTIONS 159 

QUESTIONS 

1. What is inflation? How may it be brought about? How does it 

work injustice to creditors? Give an example. 

2. What is contraction? How may it be brought about? How does it 

work injustice to debtors? Give an example. 

3. What are the effects produced on productive industries by inflation 

and contraction ? How does inflation stimulate speculation ? Illus- 
trate by an example. 

4. How do you account for the large numbers of yearly failures ? 

5. What is a financial crisis? How do inflation and contraction bring 

about financial crises ? 

6. What remedy is suggested for the injustice done debtors and creditors 

through the fluctuations of money? 

7. Give a brief historical sketch of the precious metals. 

8. To what is due the constant increase of gold and silver production 

since 1890? 

9. Is depreciation of money an advantage or a disadvantage to society in 

general ? 
ID. Who constitute the creditor class in society? 

1 1 . Give instances in history of a great increase of money. 

12. What is the defect of metallic money? What remedy is suggested? 



CHAPTER IX 
CREDIT 

Definition. — Hitherto we have considered metallic money as 
a means of effecting the various exchanges of commerce. Besides 
metallic money, however, there are other means of carrying on 
exchanges. These are the various instruments of credit. 

Credit is defined as " the power to secure commodities or 
services at the present time in return for some equivalent 
promised at a future time." (Bullock, Introduction to the Study 
of Economics, p. 264.) 

A man has credit whose standing is such that others are con- 
vinced that future payments will be made by him for present 
goods received. Credit replaces money, and saves the actual 
handling and passing of money with all the inconveniences at- 
tendant upon such transactions. 

Instruments of Credit. — The instruments of credit are of 
several kinds, including Book Credits, Promissory Notes, 
Checks, Bank Notes, and Bills of Exchange {Ih., p. 264). 

•I. Book Credit. — Book credit is a system by which two 
merchants having dealings with each other, instead of imme- 
diately paying cash for their purchases, enter these purchases in 
their books, and at the end of a certain time balance accounts, 
when he who is found to be in debt to the other settles his ac- 
count and pays the balance. For example, A buys from B, 
from time to time, to the amount of $100, and B buys from A 
to the amount of $95. The accounts run on for a month, we 
may suppose, and at the end of that time they are made up, 
and A pays to B $5, the only actual money which passes 
between them. 

160 



CHECKS l6l 

2. Promissory Notes. — A promissory note is a written 
promise to pay on demand or at a specified time. The creditor 
may indorse the note and pass it to a third person, who also 
may indorse it and pass it to another, and thus the note may 
effect many exchanges before it is finally presented for payment. 

3. Checks. — "A check is an order draw^n by an individual 
or company upon a bank ordering the payment of a certain sum 
of money to the order of a person named, or to the bearer of the 
check." 

He who draws a check must have some money on deposit 
in the bank upon which he draws the check. If the drawer of 
a check and the drawee have accounts in the same bank, the 
bookkeeper of the bank, if the drawee deposits the check 5 
credits his account with the amount of it, and deducts the same 
amount from the account of the drawer. 

An immense amount of business is done by the check system. 
There are in the United States about 20,000 commercial banks, 
each having its own check blanks distributed among the de- 
positors. Checks are drawn each day on each of these banks. 
Each bank will receive on deposit checks drawn on any other 
bank if it is in good standing. 

The bank which pays out $100 on a check can present that 
check to the bank on w^hich it is drawn and have the amount 
paid refunded. This, however, is not the method adopted. 
Much time and trouble are saved by what is known as the 
Clearing House. 

The clearing house is an institution formed by a number of 
banks for the purpose of settling accounts between them, 
through the canceling of checks and the payment of money 
balances. Every important city has a clearing house. The 
commercial banks of the city belong to the institution, and any 
city bank may become the representative of other banks situated 
in the neighboring country towns too far distant to attend the 
daily meetings of the clearing house. 

The clearing house meets daily and transacts a vast amount 
of business in a very short time. Here take place the presenta- 

POL. ECON. — II 



l62 CREDIT 

tion of the checks drawn on the different banks, the balancing 
of the amounts stated in the checks, and the final money 
settlement of the balances due each bank from the others. 

In 1920, there were 199 clearing house associations in the 
United States, and their aggregate clearings in that year reached 
462 billions of dollars. (Report Comptr. Cur., 1920, p. 280.) 

The New York Clearing House was established in 1854. In 
1920 there were 55 banks belonging to the Clearing House As- 
sociation of New York. The clearings for that year amounted 
to $252,338,249,466. The balances paid in money amounted to 
$25,216,212,386 or 9.99 per cent of the clearings. Thus, in that 
year, over $227,000,000,000 were checked off between the banks, 
obviating the need of transporting so much actual money. The 
average daily clearings during that year, 1920, amounted to 
$830,060,031, and the average daily balances paid in money to 
$82,948,067, thus saving the daily transfer of over $747,000,000 
in actual money. The need and the advantages of the clearing 
house system are obvious. (Cf. Report Comptr. Cur., 1920, 
p. 281. Cf. Horace White, Money and Banking, p. 239, for an 
account of the working of the clearing house system.) 

4. Bank Notes. — A bank note is a paper note issued by a 
bank on the strength of a certain amount of reserve specie held 
by the bank. Such notes pass instead of metallic money, and 
serve all the purposes of money. They are exchangeable for 
coin at the demand of the holder. They are discussed further 
in the chapter on Banks and Banking. 

5. Bills of Exchange or Drafts. — A bill of exchange or draft is 
a written order by which the person drawing the bill orders a 
second person, against whom he has a claim, to pay a certain 
sum of money at a specified time to a third person. The bill 
is payable at sight, or after a period indicated in days, — thirty, 
sixty, or ninety. The bill is said to be mature when the time 
limit for payment is reached. 

Exchange is Domestic or Foreign. 

Domestic exchange occurs within the country; foreign ex- 
change takes place between different countries. Bills of ex- 



BILLS OF EXCHANGE OR DRAFTS 163 

change are practically the same whether made out in domestic 
or in foreign exchange. 

Kinds of Bills of Exchange. — Foreign bills of exchange are 
of two kinds : commercial bills, which are drawn against some 
commodity that has been sold, and bankers' bills, which are 
drawn against a bank credit acquired by the deposit of a com- 
mercial bill or some other security in a bank for the purpose of 
securing foreign payments. 

Commercial bills of exchange are usually made payable after 
30, 60, or 90 days. Bankers' bills of exchange are made pay- 
able after a term of days (60, 90), on demand, or by cable. 

Use of Bills of Exchange. — Bills of exchange constitute a 
system of credit which does away in great measure with the need 
of shipping coin in payment for purchases made in different 
countries. Indeed, foreign trade could hardly be carried on 
without this medium. 

The United States, for example, imports yearly over one 
bilHon dollars' worth of goods. These imports represent pur- 
chases made by our merchants in foreign countries. If metallic 
money were the only kind of money in use in these import trans- 
actions, the United States would have to send abroad yearly 
over one billion dollars in coin. But this amount of coin does 
not exist in the country, and certainly is not to be found in the 
hands of the traders who carry on the import trade. 

Bills of exchange take the place of coin, and accomplish all the 
purposes of money. They serve to cancel the greater propor- 
tion of the indebtedness that arises between two countries, and 
but a small proportion of coin is required for shipment to pay the 
balances of trade. 

Origin and Function of Bills of Exchange. — Bills of exchange 
are drawn by the sellers of commodities against foreign pur- 
chasers. The creation of a commercial bill of exchange is as 
follows (see Annals of the American Academy of Political and 
Social Science, Nov., 1910, p. 16): 

A New York dealer in some home manufacture sells $1000 
worth of goods to an English firm in London. The goods are 



164 CREDIT 

duly shipped to the English firm, and a bill of lading is obtained 
by the New York merchant as a voucher for the genuineness of 
the transaction. Thereupon, the New York merchant makes 
out a bill of exchange, an order on the London firm to pay after 
90 days the sum of $1000, plus the expenses of insurance and 
freightage which may be incurred in the transit of the goods to 
their destination. The bill is a New York bill drawn on London 
and payable in London when it matures. 

The New York merchant may present his bill of exchange 
together with the bill of lading to a New York banker, and 
have it cashed to the full face value of the bill less the banker's 
commission and the discount. 

The New York merchant thus receives immediate payment 
for his goods, and, as far as he is concerned, the sale is completed. 
He has received immediate cash for his sale. If he had to wait 
until the money was returned to him from his foreign purchaser, 
much of his capital would be tied up and would not be available 
for business. 

The bill is now in the hands of the New York banker. He 
may send it to his correspondent in London, who will present it 
to the English firm for payment or acceptance. The bill may 
be paid at once by the English firm, or it may be kept by the 
London banker until it matures. When it is finally paid, the 
bill is withdrawn from the market. It has fulfilled its purpose 
and has saved the transmission of coin from one country to 
another. 

Or, the bill, instead of being sent on to London by the New 
York banker who has bought it from the New York merchant, 
may be retained by the New York banker and may fulfill a 
further purpose. 

A New York importer purchases $1000 worth of goods from a 
London firm. He could pay for the purchase by sending to the 
London firm the value of the goods in coin. This, however, 
would entail much inconvenience and expense. Instead, he 
goes to the New York banker mentioned above and buys from 
him the bill of exchange made out by the New York mei chant 



BILLS OF EXCHANGE OR DRAFTS 165 

and drawn on London. He gets the bill at the current rate of 
exchange upon paying the banker's commission. He sends this 
bill to the London firm in payment of his purchase. The bill 
is received by the London firm, which will collect at maturity 
from the other London firm against which the bill is drawn. 
The bill has thus fulfilled a double function and has canceled 
indebtedness in two international transactions. 

The bill we have followed is one in a hundred thousand that 
originate after a similar fashion. The bills accumulate in the 
hands of bankers who make it a business to deal in foreign ex- 
change. In every great banking house there are hundreds of bills 
of exchange drawn on all places in the world. Thus, a banker 
in Boston will have bills on London, Hamburg, Amsterdam, 
Paris, Lisbon, Madrid, Vienna, etc. These bills originate in the 
manner just explained. Merchants in Boston sell goods to 
merchants in all those several cities mentioned. They draw 
bills of exchange on the foreign merchants, just as a man might 
draw his check on a bank which holds his money in deposit. 
They may present these bills to their bankers and get the face 
value of the bills less the bank discount. 

Now, if the Boston merchants do so in 1000 transactions, there 
will be 1000 bills of exchange in the hands of Boston bankers on 
those foreign cities. If they do so in 100,000 transactions, 
there will be 100,000 bills of exchange in the hands of the Boston 
bankers. Thus the bills accumulate. 

The bankers sell these bills to those who want to pay their 
debts abroad. If. a Boston merchant has bought goods in Lon- 
don, Hamburg, Paris, Lisbon, he owes the merchants in those 
cities. It is much easier to buy bills of exchange on those foreign 
cities and mail them across the ocean than to pay these debts 
with actual coin. This is what the merchant does. 

Since London is the clearing house of the world, the bills of 
exchange for sales in every city of Europe may be draw^n pay- 
able in London, and these bills may be sent by American 
purchasers to the foreign merchants in payment for their 
purchases, whichever may be the city in which these foreign 



i66 CREDIT 

merchants are located. Such bills are called indirect bilb of 
exchange. 

As the commercial transactions between different countries 
are of great variety and for every conceivable amount, it is 
practically always possible, especially in large centers, to obtain 
bills covering the amount of any indebtedness. 

Rate of Exchange. — Many bankers and exchange brokers 
make a business of dealing in bills of exchange. They buy them 
from the merchants who have sold goods to foreign purchasers, 
and sell them again to merchants who seek this means of paying 
their foreign debts. 

The price paid for the bills will be less than the face value of 
the bills by the amount of the banker's commission. This com- 
mission is very small for individual bills, but makes a large 
total when the business of exchange is very great, and constitutes 
one of the sources of profit for the bankers. 

The price paid for a bill of exchange will depend, moreover, on 
the condition of exchange between different countries. Gold, the 
money of exchange, has not the same value in different countries. 
Its value will vary, depending, among other things, on the rela- 
tive amount of money in the different countries, and this will 
depend on the balance of trade and the balance of accounts. 
Hence arises what is called the Rate of Exchange, which may be 
described as the figure at which home money will exchange for 
foreign money. 

Thus, there will be a rate of exchange between the United 
States and England, France, Germany, Holland, and all other 
countries with which the United States has commercial dealings, 
and the amount of United States money required at any one 
time to buy a pound sterling, a franc, a mark, a guilder, etc., 
will be the rate of exchange in the United States with the several 
countries at that time. 

The rate of exchange has reference to bills of exchange. It 
may be found quoted daily in the newspapers. 

The rate of exchange may be at par, above par, or below par. 
The par of exchange is determined by the government in order 



BILLS OF EXCHANGE OR DRAFTS 167 

to have a definite figure for use in Custom House transactions. 
It indicates the actual value in United States money of the 
units of the moneys of account of the different countries. 
Thus, 

The English pound sterling = $4.8665 

The French franc = .193 ($1 = 5.18I francs). 

The German reichsmark = .238 (4 marks = .952 cents). 
The Holland guilder = .402 

(N.B. In quotations of French exchange, the figure gives the number of 
francs that will exchange for one dollar United States money. In quota- 
tions of German exchange, the equivalent of four marks in United States 
money is given.) 

When the figures quoted for foreign exchange are above these 
figures, the rate of exchange is above par in the United States ; 
when below, it is below par in the United States. 

Factors determining Rate of Exchange. — It will be noticed 
that the rate may change day after day. There are various 
factors which determine the rate. They are principally the 
three following : — 

I. The time of the bill. Suppose a New York merchant 
has to pay a debt in London of £100 for goods received. He 
goes to a broker and buys a bill of exchange on London for £100. 
The broker may have a short bill of exchange, i.e. one that will 
mature say in ten days, and for that bill he will demand $4.86| 
to the pound sterling, so that the merchant will have to pay 100 
times $4.86|, or $486.50 for the £100. Again, the broker may 
have a long bill of exchange, i.e. one that will not mature be- 
fore ninety days, and for this he will demand $4.84! to the 
pound sterling, so that the merchant will pay 100 times $4.84^, 
or $484.50 for the £100. 

The difference in the exchange rate depends here on the quick- 
ness with which cash can be got on the bill. The lo-day bill 
can be converted into cash in 10 days ; the 90-day bill, not for 
three months. 

The shorter the time before the bill matures, the higher the 
price of the bill. Brokers can increase their profits considerably 



1 68 CREDIT 

by buying long bills from the drawers and holding them until 
near the time of maturity, when they can sell them at a much 
higher rate. 

2. The credit of the drawer of the bill. The price which 
a merchant will pay for a bill of exchange will be higher the 
greater the credit and the more secure the standing of the drawer 
of the bill. The drawer may have to make good the value of 
the bill, and the higher his rating in the business world, the 
greater certainty is there that the ultimate payment of the bill 
will not be defaulted. Hence the higher rate demanded for 
bills drawn by persons or firms of great business credit. 

3. The supply and demand of bills. Bills of exchange 
accumulate rapidly in the different business centers of a country. 
There is also a constant demand for bills of exchange. But these 
two factors, supply and demand, are constantly changing, and 
the rate of exchange will vary with the factors. 

If, for instance, there are 5000 bills of exchange in Boston on 
London, and Boston merchants desire 10,000 such bills, the de- 
mand will exceed the supply, and as a consequence the rate will 
rise. On the other hand, if there are 10,000 bills of exchange 
and a demand for only 5000, the supply will exceed the demand 
and the rate will fall. 

The supply and demand of bills will depend on the relation of 
exports and imports. When the exports exceed the imports, 
there are more sales than purchases, consequently more credits 
than debts, consequently a surplus of bills. When, however, 
the imports exceed the exports, there are more purchases than 
sales, consequently more debts than credits, and consequently a 
deficit of bills. In the former case, exchange will be below par ; 
in the latter case, exchange will be above par. 

Favorable and Unfavorable Rate of Exchange. — When in 
any country the bills of exchange on foreign countries are quoted 
above par, the exchange is said to be unfavorable to that country. 
When in any country the bills of exchange on foreign countries 
are quoted below par, the exchange is said to be favorable to 
that country. To illustrate: — 



BILLS OF EXCHANGE OR DRAFTS 169 

England United States 

500,000 sales ; 500,000 purchases ; 

500,000 credits ; 500,000 debts ; 
Result — 50D,ooo bills of exchange in England on United States. 

100,000 purchases ; 100,000 sales ; 

100,000 debts ; 100,000 credits; 

Result — 100,000 bills of exchange in United States on England. 

Rate below par. Rate abov^e par. 

Exports exceed Imports. Imports exceed Exports. 

In England, the rate of exchange with the United States is 
below par, and the exchange is favorable to England. 

In the United States, the rate of exchange with England is 
above par, and the exchange is unfavorable to the United States. 
Here, debtors can pay only 100,000 debts to England by bills of 
exchange, because there are only 100,000 bills of exchange to be 
had. The remaining 400,000 debts will have to be paid by the 
export of gold. The rate of exchange in this instance would be 
very high. 

The change from favorable to unfavorable exchange, as it is 
but temporary, does not denote any great peril or inconvenience. 
It has significance, however, for brokers, who must supply the 
gold for shipment. 

Variation of Rate of Exchange. — The variation of the rate of 
exchange will turn above or below the par of exchange, but, 
ordinarily, it will vary above and below this figure by not more 
than 2J cents. There are two causes for this. 

I . Merchants use bills of exchange because they are a cheaper 
and more convenient means of paying their foreign debts than 
would be the exporting of gold specie. The exporting of gold 
costs for freightage and insurance 2^ cents per English pound. 
If the rate of exchange should rise to $4.8965, the United States 
debtors would find it cheaper to export gold specie than to buy 
a bill of exchange. Again, if the rate of exchange should fall to 
$4.8365, the United States creditors would find it more profitable 
to make their English debtors pay them in gold specie. The 
figures at which it would become more profitable to export gold 
than to buy exchange are called the " gold points." 



170 



CREDIT 



2. If the United States merchant pays $486.65 for a £100 
bill of exchange, and can sell the bill for $488 or $490, making 
a profit of two or three dollars on the hundred pounds, he will be 
led to increase his exports. Many other merchants will per- 
ceive the same advantage, and will increase their exports. The 
result will be that there will be an increase of bills of exchange, 
and a consequent fall in the rate. 

This fact was noticed at the end of the Franco-Prussian war. 
Because of the immense payments France had to make to Ger- 
many, foreign paper in France was far above par, and the exports 
increased enormously for several years. 

All that has been said about foreign exchange applies to domes- 
tic exchange. When exchange between cities is quoted at 25 
cents premium or 25 cents discount, for example, it means that 
these sums must be added to or subtracted from every one 
thousand dollars exchanged between the cities. The condition 
of exchange between the large cities may be seen daily in the 
newspapers. 

QUESTIONS 

1. What is credit? What are the principal instruments of ciredit? 

2. Explain the use of book credit, promissory notes, checks. 

3. What is a clearing house? Give an account of the method followed 

in a clearing house. What is the advantage of a clearing house? 

4. What are bank notes ? 

5. What is a bill of exchange? What is domestic' exchange ? Foreign ex- 

change ? 

6. What are the different kinds of bills of exchange ? 

7. Explain the use of bills of exchange. 

8. Describe the course of a bill of exchange from the moment it is made 

out to the time it is cashed. Who deal in bills of exchange ? 

9. What is rate of exchange ? What is meant by par of exchange ? How 

is it fixed ? 

10. What are the factors that determine the rate of exchange ? Give ex- 

amples to illustrate each factor. 

11. What are favorable and unfavorable exchange? Illustrate. 

12. What is meant by "gold points"? What will be the extent of the 

variation in the rate of exchange? Why? 



CHAPTER X 

BANKS AND BANKING 

Definition. — Banking is a general term " applied to the 
business of dealing or trading in money, checks, drafts, prom- 
issory notes, bonds, mortgages, and other printed or written 
obligations for the payment of money or its equivalent." 
(Coffin, A, B, C of Banking.) 

The business is done, like any other business, for the profit 
that can be made. The profit in the banking business is made 
through the interest charged on loans and through discounts 
on bills and collections. 

A bank is ''an institution for lending, borrowing, issuing, or 
caring for money." (Standard Dictionary.) 

Kinds of Banks. — There are different kinds of banks, as 
follows : Federal Reserve Banks, National Banks, State Banks, 
Private Banks, Loan and Trust Companies, Savings Banks. 

Federal Reserve Banks were created by the Federal Reserve 
Act, passed Dec. 23, 1913. 

National Banks owe their origin to the National Bank Act of 
1863. 

State Banks are such as are incorporated under the laws of 
the several states. 

Private Banks are banks organized by private individuals or 
corporations. 

The four kinds of banks just mentioned are called commer- 
cial banks. They are so called because they assist the commer- 
cial transactions of merchants. 

Loan and Trust Companies are a class of state corporations 
originally instituted to care for trust funds. They have usurped 
many of the operations of regular banking institutions. 

171 



172 



BANKS AND BANKING 



Savings Banks are instituted to receive and care for deposits 
from the people. The deposits are invested and a rate of in- 
terest paid to depositors. The savings banks do not usually 
carry on any banking business in the strict sense of the term. 

On June 30, 1920, the standing of the different kinds of banks 
was as follows: — 







Number 


Capital 


Deposits 


National Banks . 


8,019 


$1,220,781,000 


$13,705,325,000 


State Banks .... 


18,195 


920,211,000 


10,873,035,000 


Savings Banks 


1,707 


68,183,000* 


6,536,596,000 


Private Banks 


799t 


13,334,000 


169,573,000 


Loan and Trust Cos. . 


1,408 


475,745,000 


6,085,675,000 





* 1087 stock savings banks. 

t Only one fourth of banks reporting. (Stat. Abstr. 1920.) -» 

Organization and Nature. — (i) Federal Reserve Banks. — 
Under the Federal Reserve Act, passed Dec. 23, 1913, the conti- 
nental territory of the United States is divided into twelve 
districts, which are known as ''Federal Reserve Districts." 
In each district there is designated one city which is called 
a "Federal Reserve City." In each federal reserve city a cen- 
tral bank is organized which is known as the "Federal Reserve 
Bank of (naming city)." 

A federal reserve bank must have a subscribed capital of 
not less than $4,000,000. The capital stock is divided into 
shares of $100, and is subscribed by member banks. The mem- 
ber banks of any federal reserve bank are all the national banks 
in that federal reserve district, together with any other banking 
institutions, within the district, that conform to the necessary 
requirements. State banks, private banks, and trust companies 
may become members by subscribing to the capital stock of the 
federal reserve bank. They thereupon come under the control 
of the Federal Reserve Board, the board that is in general charge 
of the federal reserve system. 



FEDERAL RESERVE BANKS 1 73 

Member banks must subscribe to the capital stock of the fed- 
eral reserve bank in a sum equal to 6 per cent of their paid-up 
capital and surplus. One sixth of the subscription must be paid 
at the time of organization as a member bank, one sixth within 
three months, and one sixth within six months thereafter. The 
remainder of the subscription is subject to call when deemed 
necessary by the Federal Reserve Board. Should the sub- 
scriptions of the banks within the district be insufficient to 
provide the amount of capital required, the deficit may be made 
up by public subscription. However, no individual, copartner- 
ship, or corporation is permitted to own more than $25,000 worth 
of stock in any federal reserve bank. Should the total subscrip- 
tions by banks and public be insufficient, the deficit may be made 
up out of money in the United States Treasury. When the 
proper amount of capital stock has been subscribed to, an or- 
ganization certificate is filed with the Comptroller of the Cur- 
rency, and thereupon the federal reserve bank becomes a body 
corporate and may commence business. 

The business of each federal reserve bank is conducted by a 
board of directors consisting of nine members and holding office 
for three years. The. members are divided into three classes, 
A, B, and C. Class A consists of three members chosen by the 
stockholding banks. Class B consists of three members elected 
by the stockholding banks from among persons actively engaged 
in their district in commerce, agriculture, or some other indus- 
trial pursuit. Class C consists of three members appointed by 
the Federal Reserve Board. One of these members of Class C 
is designated by the Federal Reserve Board as ch-airman of the 
board of directors and as Federal Reserve Agent. As federal 
reserve agent he must make regular reports to the Federal 
Reserve Board, and act as its official representative. No senator 
or representative in Congress can be an officer or a director of a 
federal reserve bank. No director of Class B can be an officer, 
director, or employee of any bank, and no director of Class C can 
be an officer, director, employee, or stockholder of any bank. 

Each federal reserve bank may establish branch banks within 



174 BANKS AND BANKING 

its district. A majority of the branch bank's directors are ap- 
pointed by the bank, the others by the Federal Reserve Board. 

The earnings of the federal reserve banks are apportioned as 
follows : The stockholders are entitled to an annual cumulative 
dividend of 6 per cent on the paid-in capital stock. The re- 
mainder of the earnings must be paid to the United States as 
a franchise tax. One half of this remainder, however, is paid 
into a surplus fund until it amounts to 40 per cent of the paid-in 
capital stock of the federal reserve bank. 

Federal reserve banks, including the capital stock and surplus 
therein, and the income derived therefrom, are exempt from all 
taxes except taxes upon real estate. 

The Federal Reserve Board consists of seven members ; the 
Secretary of the Treasury and the Comptroller of the Currency 
are members ex-officio, and five members are appointed by the 
President of the United States, by and with the advice and 
consent of the Senate. Not more than one of these appointees 
of the President can be selected from any one federal reserve 
district. At least two of them must be persons experienced in 
banking or finance. One of them is designated by the President 
as governor and one as vice-governor of the Federal Reserve 
Board. No member of the Federal Reserve Board may be an 
officer or director of any bank, banking institution, trust com- 
pany, or federal reserve bank, or hold stock in any bank, bank- 
ing institution, or trust company. No senator or representative 
in Congress can be a member of the Federal Reserve Board. 
The expenses and salaries of the Federal Reserve Board are paid 
through assessments levied upon the federal reserve banks 
throughout the country. 

The Federal Reserve Board is authorized and empowered: 
(i) To examine at discretion the affairs of each federal reserve 
bank and of each member bank, and to issue a weekly statement 
showing the condition of each federal reserve bank ; (2) To per- 
mit and in time of need to require federal reserve banks to re- 
discount the discounted paper of other federal reserve banks ; 
(3) To suspend for not exceeding thirty days (and renew such 



FEDERAL RESERVE BANKS 1 75 

suspension for periods not exceeding fifteen days) any reserve 
requirement specified in the act ; (4) To supervise and regulate 
the issue and retirement of federal reserve notes ; (5) To add 
to the number of cities classified as reserve and central reserve 
cities under existing law, to reclassify them or to terminate 
their designation as such ; (6) To suspend or remove any officer 
or director of any federal reserve bank ; (7) To require the writ- 
ing off of doubtful or worthless assets upon the books and bal- 
ance sheets of federal reserve banks; (8) To suspend, for the 
violation of any of the provisions of the act, the operations of any 
federal reserve bank, and, if advisable, to liquidate or reorganize 
such bank ; (9) To require bonds of federal reserve agents, and 
to make regulations for the safeguarding of all collateral, bonds, 
federal reserve notes, money, or property of any kind deposited 
in the hands of such agents; (10) To exercise general super- 
vision over the federal reserve banks. 

The Federal Reserve Board must annually make a full report 
of its operations to the Speaker of the House of Representatives, 
who must cause the same to be printed for the information of 
Congress. 

All moneys held in the general fund of the United States 
Treasury, except the fund provided for the redemption of circu- 
lating notes, may be deposited in the federal reserve banks, 
and the banks may act as fiscal agents of the United States. 
All government revenues may be deposited in the federal re- 
serve banks, and disbursements may be made by checks drawn 
against such deposits. Interest is paid the government upon 
all government deposits. 

The Federal Reserve Board has power to issue to federal 
reserve banks circulating currency called federal reserve notes, 
which are obligations of the United States, and receivable by 
all federal reserve banks and member banks, and for all taxes, 
customs, and other public dues. They are redeemable in gold 
at the United States Treasury, or in gold or lawful money at 
any federal reserve bank. A federal reserve bank obtains such 
circulating notes through its federal reserve agent upon deposit 



176 BANKS AND BANKING 

of gold and gold certificates or of collateral equal to the amount of 
notes required. The collateral consists of notes and bills ac- 
cepted for rediscount. The notes are of the denominations $5, 
$10, $20, $50, $100, $500, $1000, $5000, $10,000. 

Federal reserve notes are marked by a special number and 
letter indicating the bank through which they were issued. 
Notes issued through one federal reserve bank, when received 
by another federal reserve bank, must be promptly returned, 
for credit or redemption, to the federal reserve bank through 
which they were originally issued. No federal reserve bank 
can pay out notes issued through another bank under a penalty 
of a ID per cent tax upon the face value of the notes paid out. 
Federal reserve notes redeemed at the Treasury of the United 
States must be paid out of the redemption fund maintained 
by each federal reserve bank with the Treasurer of the United 
States, and must be returned to the federal reserve bank through 
which the notes were issued. A federal reserve bank may retire 
its circulating notes at any time by depositing through its fed- 
eral reserve agent gold or lawful money of the United States with 
the United States Treasurer. The notes issued through any 
bank are a first and paramount lien on all the assets of such bank. 

Each federal reserve bank must maintain reserves in gold or 
lawful money of not less than 35 per cent against its deposits, 
and reserves in gold of not less than 40 per cent, normally, against 
its federal reserve notes in actual circulation. A part of this 
40 per cent (not less than 5 per cent of the value of the notes) 
must be deposited with the Treasurer of the United States. 
By permission of the Federal Reserve Board, however, a federal 
reserve bank may let its gold reserve against its notes fall below 
40 per cent, but it must pay a tax on the amount of the deficiency. 

A Federal Advisory Council helps the Federal Reserve Board 
in an advisory capacity in the general affairs of the reserve 
banking system. The council consists of one member from each 
federal reserve district, and meets at Washington, D.C., at least 
four times each year. 

(2) National Banks. — The national banks have not ceased to 



NATIONAL BANKS , 177 

exist under the new banking law. They have, however, become 
absorbed in the federal reserve system. They were allowed 
sixty days after the passage of the Federal Reserve Act in which 
to signify their intention of becoming member banks of the 
federal reserve system, and one year within which they should 
become actual members by subscribing to the stock of the 
federal reserve bank of their district. Under the terms of the 
act of 1 9 13, those national banks which did not enter the new 
system within the time limit were forced to surrender their 
charters and to liquidate or become state or private banks- 
Nearly all the national banks of the country have signified their 
intention of becoming members of the federal reserve system. 

It will be necessary to study the original nature and organiza- 
tion of the national banks, as well as their present status, in order 
to appreciate the changes made by the new law. 

The method of organization and other details concerning 
national banks are laid down in the National Bank Act of 1863, 
and in the amendments to that act made in subsequent years. 

A bureau of the Treasury Department was created, the chief 
of which is the Comptroller of the Currency, who executes all the 
laws passed by Congress affecting the national bank notes, and 
makes an annual report to Congress on the condition of all 
national banks. Under the Federal Reserve Act of 1913, the 
Comptroller of the Currency also is charged with the issue and 
regulation, under the general supervision of the Federal Reserve 
Board, of all federal reserve notes. 

At least five stockholders join to form a national bank. They 
make application to the Comptroller of the Currency, stating the 
standing of each and showing some prominent person's voucher 
for their character. '' Articles of Association " are made out, 
as prescribed by law, stating the title, location, number of 
directors, time of meeting for election, amount of capital stock, 
etc. There must be at least five directors, each a citizen of the 
United States, and each an owner of at least ten shares (or five 
shares, if the capital does not exceed $25,000). Three fourths 
of the board must have resided a year in the state, and three 

POL. ECON. — 12 



178 BANKS AND BANKING 

fourths of the board must continue to reside as directors. 
Every $100 share gives a vote. 

A " Certificate of Association " is made out. It contains 
among other things the names and residences of all the sub- 
scribing shareholders. 

The amount of capital must be as follows : — 

$ 25,000 or more for a place having 3,000 inhabitants or less; 

50,000 or more for a place hav'ng 6,000 inhabitants or less; 

100,000 or more for a place having 50,000 inhabitants or less ; 

200,000 or more for a place having over 50,000 inhabitants. 

One half of the capital must be paid up in cash at the time 
of organization, the rest in installments of 10 per cent a month. 

An oath is taken by the directors to '^ diligently and honestly 
administer the affairs " of the bank. A president and a cashier 
are elected, together with the other ofl&cers as they may be 
needed. 

Up to 19 13, the bank had to invest in United States govern- 
ment bonds one quarter of its capital, if the capital was $150,000 
or less, and $50,000 at least, if the capital was greater. (Act 
July 12, 1882.) At first, circulating notes could be taken out 
by the bank to the amount of 90 per cent of its bonds, but this 
amount was changed by the act of March 14, 1900, to equal the 
par value of the bonds. As explained later, the national bank 
notes are now in process of being retired. National banks are 
no longer required to invest in bonds. 

A reserve amounting to 5 per cent of the circulation must be 
kept for the redemption of the notes in circulation. Should 
the bank desire to withdraw its circulation, it must make a de- 
posit of lawful money with the United States Treasury to redeem 
the notes. Under the old law, however, not more than the sum 
of $9,000,000 of notes could be withdrawn from circulation by 
national banks in one month. (See law of May 30, 1908.) 
While the notes are in circulation, the bank pays to the United 
States Treasury a yearly tax of one half of i per cent on notes 
secured by 2 per cent bonds, and i per cent on notes secured 
by bonds paying a higher rate of interest. All state banks are 



NATIONAL BANKS 1 79 

charged a 10 per cent tax on their notes, a tax which is prac- 
tically prohibitive. 

When the stockholders have paid in the amount per share of 
their holdings, each one receives a " Certificate of Stock," and 
these certificates are recorded in one of the books of the bank 
and are transferable only on the books of the bank. Thus the 
stockholders of the bank and the number of shares each one 
holds can be known at all times. 

Officers are chosen and by-laws are made in accordance with 
the banking law^s of the country. 

The law requires that one tenth of the net earnings be put 
aside annually to form a fund in reserve. This is known as the 
" Surplus and Undivided Profits Fund," and it must reach at 
least 20 per cent of the capital stock. The " Surplus " some- 
times is far in excess of the capital. When the surplus is 
secured, dividends may be paid to the stockholders. These 
dividends are the earnings of the banking business. 

Should the bank meet reverses, the stockholders may be 
called upon to supply the funds needed to carry on business. 
In this case, an assessment is levied on each stockholder, pro- 
portionate to the number of shares held by him. 

Reserves in lawful money must be kept with the Federal 
Reserve Bank to meet the deposits. 

Under the old law, up to 1913, this reserve had to be, for ordi- 
nary banks, 15 per cent of their outstanding notes and deposits. 
Three fifths of this amount might be redeposited with other 
national banks in 46 (formerly 17) specified large cities, known 
as Reserve cities. For reserve city banks, the reserve had to 
be 25 per cent of their deposits and outstanding notes. One 
half of this amount might be redeposited in national banks in 
New York City, Chicago, and St. Louis, which are known as 
Central Reserve cities. 

Under the Federal Reserve Act of 1913, as amended June 21, 
1917, country national banks, which have become member banks 
of the Federal Reserve system, must maintain with the Federal 
Reserve banks of their respective districts reserves equal to not 



l8o BANKS AND BANKING 

less than seven per cent of their demand deposits and three per 
cent of their time deposits. Reserve city national banks must 
maintain reserves equal to not less than ten per cent of their 
demand deposits and three per cent of their time deposits. Cen- 
tral reserve city national banks must maintain reserves equal to 
not less than thirteen per cent of their demand deposits and 
three per cent of their time deposits. (See, however, amendment 
to Federal Reserve Act passed Sept. 26, 19 18.) 

A national bank may, under the regulations and subject to 
such penalties as may be prescribed by the Federal Reserve Board, 
allow its balance to fall below the required amount, but such 
bank can make no further loans and can pay no dividends until 
the total balance required by law is fully restored. (7^.) 

When all the formalities required in the organization of a 
national bank are complied with, the Comptroller issues a cer- 
tificate authorizing the corporation to begin business. Charters, 
which may be extended, are given for twenty years. 

Certain restrictions are imposed on national banks to make 
the banking business safer. Thus, 

No real estate may be held for longer than five years. 

Only legal interest may be charged by the bank on its loans. 
The legal interest is the interest allowed by law in the state. 

Not more than one tenth of the capital may be loaned to one 
individual or one corporation. 

A bank may not loan on its own shares, nor may it incur 
indebtedness in a sum exceeding the paid-in capital. 

The bank must make five sworn reports yearly to the Comp- 
troller, and special reports when demanded. Bank examiners 
may examine the affairs of the bank at any time. 

If the bank goes into liquidation, voluntary or forced, the 
Comptroller appoints a receiver. The circulating notes of 
the bank have a prior lien on the assets. The depositors and 
other creditors are then paid, and last of all the stockholders. 

As already noted, some of the foregoing provisions affecting the 
organization of national banks were changed by the Federal Re- 
serve Act. Thus, national banks are no longer obliged to invest 



NATIONAL BANKS i8l 

any portion of their capital in United States government bonds. 
When the national bank notes shall have been replaced by 
federal reserve notes, the provisions affecting the national bank 
notes will no longer be operative. 

The manner of replacing the national bank notes is as follows : 
After Dec. 23, 191 5, the national banks may make application to 
the Treasurer of the United States to sell the 2 per cent United 
States bonds in their possession and now forming the basis of 
note circulation. The Federal Reserve Board may oblige the 
federal reserve banks to buy the bonds offered by the national 
banks. Not more than $25,000,000 of such bonds can be pur- 
chased by the federal reserve banks in one year. The federal 
reserve banks must deposit lawful money with the United States 
Treasurer for the purchase price of such bonds. This money 
must be used by the United States Treasurer to cancel and per- 
manently retire the national bank notes. The federal reserve 
banks purchasing the bonds may take out circulating notes 
equal to the par value of the bonds. The 2 per cent United 
States bonds now securing the circulating notes will gradually 
come into the possession of the federal reserve banks, but these 
bonds which now bear the circulation privilege will gradually 
be exchanged for 30-year 3 per cent gold bonds without the cir- 
culation privilege, and thus United States bonds will ultimately 
cease to be the basis of note circulation. 

Under the new law, the stockholders of every national bank are 
held individually responsible for all contracts, debts, and engage- 
ments of the bank, each to the amount of his stock therein, at 
the par value thereof, in addition to the amount invested in such 
stock. The amount of reserves and the manner of keeping 
such reserves are modified as seen on a preceding page (see page 
179). National banks together with all member banks must 
be examined at least twice each year, and oftener if considered 
necessary, by examiners appointed by the Comptroller of the 
Currency. When a national bank or any member bank goes 
into Kquidation, voluntary or forced, and a receiver is appointed 
by the Comptroller, such member bank must surrender all 



1 82 BANKS AND BANKING 

of its holdings of the capital stock of the federal reserve bank of 
which it is a member, and receive payment therefor less any 
liability it may have with the federal reserve bank. 

(3) State Banks. — State banks are organized according to 
the laws of the state in which they are situated. These laws 
differ in the different states. 

State banks do not issue circulating notes. They could do 
so before 1865, but in that year a law was passed imposing a 
yearly tax of 10 per cent on the circulation of state banks, with 
the result that all such notes were withdrawn. 

(4) Private Banks. — Private banks are organized by private 
men of means or private corporations. They are restricted by 
no special laws of state or nation, and carry on their business 
like any other business. Their personal credit must secure the 
confidence of the people. If banks organize under state or 
national laws, they are obliged to submit their undertakings to 
these laws, but, because the state or nation stands sponsor for 
them, they gain more extensive patronage. 

(5) Loa7i and Trust Companies. — Loan and trust companies 
are organized under the laws of the several states. They may 
be termed American institutions, dating from 181 2. They are 
stock companies, the shares being held by stockholders who re- 
ceive a profit in the shape of dividends, and are liable for losses 
proportionate to the holdings of each. The company is managed 
by a board of directors or trustees elected by the shareholders. 

Reports are made twice a year to the State Banking Depart- 
ment. A receiver winds up the business in case of voluntary 
liquidation or failure. 

Originally intended for the business of securing lives and 
granting annuities, the loan and trust companies later took 
up the business of holding trusts and procuring capital for 
various enterprises. These latter forms of business finally 
became the specialty of the loan and trust companies, life in- 
surance and the granting of annuities becoming the special 
business of life insurance companies. 

State banks, private banks, and loan and trust companies 



SAVINGS BANKS 1 83 

may become member banks of the federal reserve bank of the 
district in which such banks are located. To become a member 
bank, a bank must subscribe to the capital stock of the federal 
reserve bank in its reserve district in a sum equal to 6 per cent of 
its paid-up capital stock and surplus. The bank must possess a 
paid-up unimpaired capital sufficient to entitle it to become a 
national bank in the place where it is situated, and be subject 
to all the provisions and regulations of the national bank law 
which have not been repealed by the Federal Reserve Act. 

(6) Savings Banks. — A savings bank takes deposits not for 
its own use but for safekeeping. " The prime consideration is 
safety, not profit or income." (Fiske, The Modern Bank, p. 244.) 

The savings bank is in the charge of trustees, who serve gra- 
tuitously, and should have no personal interest in the use of the 
funds. The officers are chosen by the trustees and are paid 
salaries. 

The trustees decide on all investments, and they declare the 
interest to be paid on deposits. They hold frequent meetings 
to receive reports from the officers, and direct all business. The 
trustees are the directors of the bank, and in them all final 
responsibility rests. 

The funds belong to the depositors, and the revenue goes to 
the depositors. There may be a surplus fund, but there are no 
'' Undivided Profits." The surplus is a safeguard against losses 
and emergencies. 

'' Savings banks are organized either as corporations or as 
mutual societies managed by a board of trustees acting for the 
depositors. The latter type is especially common in the Eastern 
states." (Ely, Outlines of Economics, p. 264.) 

Sometimes savings banks are organized with capital stock. 
Such are the '' Stock Savings Banks." When there are profits 
over and above the interest due the depositors, these profits are 
paid in dividends to the stockholders. 

A vote of two thirds of the shares or two thirds of the trustees 
can discontinue the bank. A receiver is then appointed to 
liquidate the assets and pay off the depositors and stockholders. 



1 84 BANKS AND BANKING 

In many states supervision and regulation of savings banks 
is carried on by state officials. In New York, no savings bank 
can be organized without the consent of the Superintendent of 
the Banking Department. Semiannual reports must be given 
to the Superintendent, and an examination of the affairs of the 
bank is made every two years. Special reports may be required 
and special examinations held at any time. The Superintendent 
has no immediate power over the officers of the bank, but he 
may report any defect to the Legislature and may apply to the 
courts for a remedy. 

Postal Savings banks, a special kind of savings banks main- 
tained by the government, are described in Chapter XII. 

Functions of Federal Reserve Banks. — The functions of a 
federal reserve bank are : (i) To receive deposits from its mem- 
ber banks, and from the Uni-ted States ; (2) To discount notes, 
drafts, bills of exchange, acceptances arising out ot actual com- 
mercial transactions (Note. — A federal reserve bank may not 
discount notes, drafts, or bills of exchange issued or drawn for 
the purpose of carrying or trading in stocks, bonds, or other 
investment securities, except bonds and notes of the government 
of the United States); (3) To make advances to its member 
banks on their promissory notes; (4) To purchase and sell in 
the open market, at home or abroad, cable transfers and bankers' 
acceptances and bills of exchange; (5) To deal in gold coin 
and bullion at home and abroad, to make loans thereon, and 
to contract for loans of gold coin or bullion; (6) To invest in 
United States bonds and bonds issued by any state, county, 
district, or municipality ; (7) To purchase from member banks 
and sell bills of exchange arising out of commercial transactions ; 
(8) To establish from time to time, subject to revision of the 
Federal Reserve Board, rates of discount to be charged by the 
federal reserve bank for each class of paper; (9) To establish 
accounts with other federal reserve banks for exchange purposes, 
to open and maintain banking accounts in foreign countries, 
to establish agencies in such countries for purchasing, selling, and 
collecting, and to buy and sell through correspondents and 



DISCOUNTING NEGOTIABLE PAPER 185 

agencies, prime foreign bills of exchange; (10) To be the medium 
through which federal reserve notes shall be issued. 

Functions of Other Commercial Banks. — The banks here 
included are member banks of any federal reserve bank, state 
banks, and private banks. The functions of these banks include 
the following items: discounting negotiable paper; receiving de- 
posits; buying and selling exchange, coin, and bullion; making 
loans; giving bank credit to merchants; loaning money on farm 
lands and other real estate; establishing branch banks in foreign 
countries; acting as agents for insurance companies and in real 
estate deals, and in a fiduciary capacity for other persons. 

(i) Discounting Negotiable Paper. — When a bank cashes 
any form of paper, it charges a certain rate of discount for that 
accommodation. A merchant, for example, may have promis- 
sory notes of his debtors. These he may indorse and have 
cashed at once by the bank. His debtors are now the debtors 
of the bank, but he is responsible if those debtors fail to pay the 
bank when the notes mature. The bank attends to the collec- 
tion of these notes. 

The rate of discount depends on various factors, which may 
be summed up as follows : — 

1. The amount of money available in the hands of bankers 
for the discount business. This will depend on two things, — 
the volume of standard money in general circulation in the 
country, and the state of trade in the country or in the locality 
where the discount is asked. When business is brisk, there is 
great demand made by merchants to have their bills receivable 
discounted, and the demand for money will cause the rate to rise, 
while in times of dull trade, when the bills of the merchants are 
few and the demand for money slight, the rate will be low. 

2. The general rate of profit that may be obtained for the use 
of capital in business. When this rate of profit is high, the 
rate of discount will be relatively high; when the profit rate 
is low, the discount rate will be relatively low. 

3. The credit of the merchant whose bills are discounted. 

4. The credit of the indorser in " double-name " paper. In 



1 86 BANKS AND BANKING 

these two items, 3 and 4, the poorer the credit, the higher the 
rate. 

5. The time of the negotiable paper. Time enters here as an 
element of risk. The longer the time the banker has to wait 
for the maturity of the bill, the greater the risk which he runs, 
and hence a higher rate of discount is charged for a long-time 
bill. 

(2) Receiving Deposits. — In some cases banks do not pay 
interest on deposits, but often competition among banking in- 
stitutions leads them to offer a low rate of interest. 

Up to the establishment of the federal reserve system, the 
national banks were frequently made depositaries of public 
moneys of the United States. Government deposits in such 
banks were, until 1907, " limited to the current internal revenue 
receipts." (Hepburn, Contest for Sound Money, p. 423.) A 
law enacted in 1907 allowed customs receipts to be deposited in 
the banks. By the Federal Reserve Act of 1 913, it is prescribed 
that all government moneys, except the fund kept for the re- 
demption of circulating notes, shall be deposited in federal 
reserve banks. The Secretary of the Treasury, however, has 
the right to use member banks as depositaries (Sec. 15). 

(3) Buying and Selling Exchange, Coin, and Bullion. — The 
buying and selling of exchange has been explained in treating 
of bills of exchange. 

Whenever large amounts of specie or bullion are required for 
shipment to any point, usually the banks carry out the trans- 
action, charging certain prescribed rates for the labor. 

(4) Making Loans. — Loans may be made in various ways. 
A merchant may, for example, need money to carry on a pressing 
business transaction. He makes out his personal note promis- 
ing to pay a certain sum to the bank at a future day, and gives 
it to the bank. The credit of the merchant may be such that 
the bank may advance the money, deducting the discount. 
The merchant's note is single-name paper. If the note is in- 
dorsed by some one else, it is called double-name paper or 
indorsed paper. 



MAKING LOANS 1 87 

Or, again, the merchant may borrow money from the bank by 
giving his personal note and depositing some kind of " collat- 
eral." The collateral which is offered for loans may be of 
great variety. Whether or not the collateral shall be accepted 
depends in great measure on the experience and prudence of 
the banker. 

" Different communities have to deal with different securities. 
In Kansas the usual kinds are land, city lots, and occasionally 
the appurtenances to real estate, apart from the real estate ; 
growing crops, rough feed, grain, elevator and warehouse re- 
ceipts, bills of lading, live stock, poultry, produce, stocks, bonds, 
notes, contracts, leases, orders, warrants, certificates of deposit, 
insurance, products of mines, implements, machinery, furniture, 
merchandise, libraries, jewelry, personal service, rents, and per- 
haps others. Much of the property named is unfit for security, 
but all of it has been accepted." (J. T. Bradley, in Practical 
Problems in Banking and Currency.) 

Much care is expended by banks in obtaining accurate knowl- 
edge of the credit of the borrowers, who as a rule are the regular 
customers of the bank, and of the value of the security offered by 
them. Since 1895, many banks have established a credit de- 
partment under the management of a credit clerk. The duty 
of this department is to investigate " the personal character 
and habits, and the reputation for business ability and rectitude, 
. . . the business methods and practices " of those who apply 
for loans. Blank forms are used on which the borrower must 
state his business and resources, capital, investments, property, 
business profits, and, in fact, everything that will give assurance 
of his ability to meet his obligations. Moreover, the credit de- 
partment consults commercial agencies, makes inquiries in per- 
son and by correspondence, and uses all available sources of 
information to gain exact knowledge of the standing of the 
applicant. All the information gained is kept on record in the 
bank to be used in case of future loans. 

If the loan is to be paid after some time, — thirty, sixty, ninety 
days, — it is a time loan. 



1 88 BANKS AND BANKING 

If the bank in loaning its money makes the condition that it 
may call in the loan at any time, the loan is a demand loan or a 
call loan. 

The loans made by commercial banks are generally made on 
collateral that can be quickly liquidated in case of need. Loans 
are seldom made on real estate mortgages or other security on 
which it would be difficult to realize in case of sudden demand. 
Call loans, or loans for a short period of time, are those mostly 
dealt in. 

The extent to which the business of loans is carried on by the 
commercial banks is enormous. On June 30, iq2o, the loans of 
national banks amounted to over thirteen billions of dollars, 
distributed as follows: — 

Loans on Demand, secured $1,654,984,000 

Loans on Demand, unsecured 707,229,000 

Loans on Time, secured . 3,246,028,000 

Loans on Time, unsecured 7,604,971,000 

$13,213,212,000 
(Annual Report Compt. Cur., 1920, p. 121.) 

On the same date, the loans of all United States banks 
amounted to over thirty-one billions of dollars, as follows: — 

Loans secured by real estate and collateral $11,076,119,000 

All other loans 20,180,028,000 

$31,256,147,000 
(lb., p. 253.) 

(5) Giving Bank Credit to Merchants. — An immense amount 
of business is done through credit. But it is found better by 
business men to transform their personal credit into what is 
called bank credit. A merchant's own personal note would 
pass as a medium of exchange, if at all, only among a very 
limited number of persons, whereas, if he secures the credit of 
a bank, he will have a medium of exchange in the form of checks 
on the bank which will be accepted practically everywhere. 
This selling of bank credit is one of the means whereby banks 
give immense aid to commercial life. 



GIVING BANK CREDIT TO MERCHANTS 189 

The merchant may have his " bills receivable " discounted, or 
may give his notes and collateral, and may get credit for the 
amounts of the bills and notes. He need not have them cashed 
at once, but may leave the amounts to his credit in the bank to be 
drawn on later when needed. The bank in this case makes him 
a depositor for these sums, and the credit of the bank becomes 
the credit of the merchant. 

The modern commercial bank is a coworker with the mer- 
chants. The merchants by their sales produce the credits. 
These the bankers accept and change into bank credits, which 
furnish the great mass of the medium of exchange used in com- 
merce. 

The bank is well called a credit institution rather than a 
money institution. " It deals in credits. The bulk of its assets 
consists of evidences of indebtedness, and the bank is itself the 
largest debtor relative to its capital, in the business world. In 
short, everybody owes the bank and the bank owes everybody, 
and there is little about the bank or its function which does not 
smack of indebtedness." (A. B. Stickney, in Practical Problems 
in Banking and Currency, p. 207.) 

All the credits of merchants which are received by the banks 
and transformed by them into bank credits are put down as 
deposits. Hence an increase of deposits does not mean an in- 
crease of money, but it means an increase of indebtedness on 
the part of the merchants, which indebtedness has been trans- 
formed into bank credits. '' During the period in which the 
so-called deposits of the national banks have increased $1,500,- 
000,000, the money in thebanks has increased only $207,000,000." 

{lb.) 

In the panic of 1893, the deposits decreased $314,000,000, 
which means that the merchants did not buy bank credits, or 
that the banks would not exchange credits with the merchants. 
The decrease of deposits in that year was due to the action 
of the banks in contracting their so-called loans. It may not 
have been the fault of the banks. " That the American bank, 
as at present organized," sa3^s a writer of that period, '' should 



I go BANKS AND BANKING 

falter at every minor commercial crisis, and stop, as far as 
possible, the swapping of credits in a major panic, seems in- 
evitable. The necessity is due to the lack of a banking system." 
{lb., p. 211.) 

Bank credits furnish an unlimited medium of exchange. 
When bank credits are stopped, there is a shortage of the medium 
of exchange, of money, and thereupon a panic. 

(6) Loaning Money on Farm Land and Other Real Estate. — 
National banks not situated in a central reserve city may make 
loans secured by improved and unencumbered farm land and 
other real estate located within one hundred miles of the place 
in which the bank is located. Loans on farm land cannot be 
made for a longer period than five years, and loans on other 
real estate cannot be made for a longer period than ^one year, 
and neither kind of loan can be made for an amount exceeding 
50% of the actual value of the property, 

(7) Establishing Branch Banks in Foreign Countries. — Na- 
tional banks possessing a capital and surplus of $1,000,000 
or more may establish branch banks in foreign countries for 
the furtherance of the commerce of the United States, and to 
act, if required, as fiscal agents of the United States. 

(8) Acting as Agent for Fire, Life, and Other Insurance Com- 
panies. — National banks located in places where the population 
does not exceed 5000 inhabitants may act as the agent for any 
fire, life, or other insurance company by soliciting and selling 
insurance and collecting premiums on policies issued by such 
company. (Amend. Sept. 7, 19 16.) 

(9) Acting as Agent in Real Estate Deals. — National banks 
may act as the brokers or agents for others in making or procuring 
loans on real estate located within one hundred miles of the place 
in which said bank is located. (lb.) 

(10) Acting in a Fiduciary Capacity for Other Persons. — A 
national bank may act as trustee, executor, administrator, or 
registrar of stocks and bonds, guardian of estates, assignee, re- 
ceiver, committee of estates of lunatics, or in any other fiduciary 
capacity the exercise of which is permitted to state banks, trust 



FUNCTIONS OF SAVINGS BANKS 191 

companies, or other corporations in any state. (Amend. Sept. 26, 
1918.) 

Functions of Loan and Trust Companies. — The functions of 
loan and trust companies are the following: — 

1. They receive deposits. Until recently they were not re- 
quired to keep any stated percentage of their deposits on hand 
as a cash reserve. They usually deposit their funds on demand 
in commercial banks. Since Feb. i, 1909, loan and trust com- 
panies doing business in New York state must keep reserves 
in the sum of 15 per cent or 10 per cent of their deposits, de- 
pendent on the amount of population of the place in which busi- 
ness is transacted. Where the population of the place is less 
than 1,800,000, part of the reserves may be deposited on call 
in other banks or trust companies. 

2. They invest their funds — capital and deposits — in 
bonds and mortgages secured by real estate; in United States 
bonds and stocks; in bonds of the counties, cities, and towns 
of the state in which they are situated; in bonds of the state; 
in bonds secured by personal property. (Deposits are invested 
in this last item.) 

3. They make loans on real estate or personal property; on 
collateral security of stocks and bonds; on other security. 

4. They may be appointed to act as trustee under any mort- 
gage or bond issued by any municipality, body politic, or cor- 
poration, or to execute any other municipal or corporate trust; 
to act under appointment of any court, as guardian, receiver, 
or trustee of any minor, or as trustee or executor for the estates 
of deceased persons or of lunatics, idiots, or habitual drunk- 
ards; to act as fiscal or transfer agents for any state, munici- 
pality, body politic, or corporation. 

5. They purchase, invest in, and sell stocks, bills of exchange, 
bonds and mortgages, and other securities. 

6. They borrow money. 

7. They receive upon deposit for safekeeping bonds, mort- 
gages, jewelry, plate, stocks, and valuable property of any 
kind. 



192 BANKS AND BANKING 

8. They guarantee or insure persons holding titles to real 
estate against loss. 

Functions of Savings Banks. — (i) Deposits. — Savings 
banks receive deposits. A depositor upon making a deposit 
receives a pass book in which the deposit is entered. This 
serves as a receipt book, indicating the indebtedness of the 
bank to him. , 

The money deposited will draw interest, which is computed 
semiannually or quarterly. 

Money deposited may be withdrawn, but the bank may insist 
on demanding thirty or sixty days' notice whenever large sums 
are to be withdrawn, or when there is danger of a run on the 
bank. This agreement is usually entered into at the time of 
deposit. Interest on the money withdrawn is lost for the quar- 
ter or the half year, if taken out before the expiration of that 
period. 

Usually deposits are limited to a certain amount from each 
person. This is due to the principle that savings banks were 
instituted for the benefit of the poorer classes, to enable per- 
sons of small means to participate in the benefits to be derived 
from the investment of their combined deposits. Hence 
limitations are fixed with a view to excluding the wealthier 
class. 

(2) Investments. — The deposits may be invested in first 
mortgages on real estate to the amount of 60 per cent of the 
market value of the property. In this respect savings banks 
differ from commercial banks. Deposits in savings banks are 
supposed to be more or less permanent, and hence they can be 
invested in securities that are but slowly liquidated. Such 
are mortgages on real estate. Banks that may require money on 
short notice cannot allow their securities to be tied up in the 
form of real estate mortgages. 

Savings banks may invest in United States bonds, state bonds, 
bonds of counties, cities, towns, certain railroad bonds, when 
the railroads have been paying dividends for a certain number 
of years past, and in bank stocks. 



QUESTIONS 193 

The savings banks may own real estate of two kinds: (i) They 
may own the buildings they use; they may rent out what por- 
tions of the buildings they do not need for bank use. (2) When 
mortgages are foreclosed, they may hold the property and collect 
rents for it. 

QUESTIONS 

1. What is banking? What is a bank? 

2. Name the different kinds of banks. Why are certain banks called 
commercial banks? 

3. When were federal reserve banks created? How much capital must 
a federal reserve bank have? 

4. What are member banks? How much of their capital and surplus 
must member banks invest in the stock of a federal reserve bank ? 

5. Explain the constitution of the board of directors of a federal reserve 
bank. How are the earnings of a federal reserve bank apportioned ? 

6. Describe the constitution and the powers of the Federal Reserve 
Board. Where does the power of issuing circulating notes reside ? 

7. Explain the method of redemption of circulating notes. How much 
reserve must a federal reserve bank maintain? 

8. What reserves must be maintained by member banks ? 

9. Describe briefly the organization of a national bank. Mention the 
principal changes that have been made in the status of national banks by 
the federal reserve system. 

ID. Explain the method by which the national bank notes now in cir- 
culation are to be retired. 

1 1 . How are state banks organized ? 

12. How are private banks organized ? 

13. How are loan and trust companies organized ? 

14. What is the prime object of a savings bank ? Who are the managers 
of a savings bank ? 

15. What are the functions of a federal reserve bank ? 

16. What are the functions of other commercial banks ? 

17. What is discount? What factors determine the rate of discount? 

18. How are bank loans made ? What may be the nature of the security 
offered for loans ? 

19. How do merchants secure bank credits? What is the advantage 
of bank credits ? 

20. Describe the functions of loan and trust companies. 

21. Describe the functions of savings banks. 



POL. ECON. — 13 



CHAPTER XI 
HISTORY OF BANKING 

I. History of Banking in General 

History of Banking in General. — Banking originated in Italy 
in the twelfth century. The first banks were established in 
Venice, 1164-1178 ; Genoa, 1300 ; Florence, 1345. (P. H. Holz- 
apfel, O. F. M., Die Anfdnge der Monies Pietatis, pp. 17, 18.) 
The functions of these were very limited as compared with the 
functions of banks of the present day. 

Then came the Bank of Amsterdam in Holland in the seven- 
teenth century (1609). This was the more evident precursor of 
the present form of banking. It lasted for two hundred years. 

The banks of Antwerp and Hamburg were founded on the 
principle of the Amsterdam Bank. The Bank of Hamburg, 
which began in 1619, was merged in 1875 in the Reichsbank 
(Imperial Bank) of Germany. 

Banks were gradually established in different countries — 
England, Scotland, Ireland, France, Germany, Russia — and 
out of very crude and imperfect beginnings developed into the 
great systems of to-day. 

The following countries have a government or national bank, 
which is the depositary of the government funds, is supported 
wholly or in part by the government, and has exclusive right 
to issue notes : — 

England Bank of England, 1694. 

France Bank of France, 1800. 

Germany Reichsbank, 1875. 

Russia Imperial Bank of Russia, about 1856. 

Holland Bank of Netherlands, 1814. 

Belgium National Bank of Belgium, 1850. 

Norway . Bank of Norway. 1814. 

194 



BANK OF THE UNITED STATES 1 95 

Denmark National Danish Bank, 1818. 

Spain Bank of Spain, 1856. 

Austria-Hungary Austro-Hungarian Bank (1816), 1877. 

II. History of Banking in the United States 

In the United States, during the colonial times, the first at- 
tempt at the establishment of a bank was made in Massachusetts 
in 1 7 14. The bank lasted but a short time. After the adoption 
of the Constitution, banks were organized in many of the states. 

I. Bank of the United States. — Alexander Hamilton, the 
first Secretary of the Treasury, drew up a plan for the es- 
tabHshment of a United States Bank, " to be a regulator of the 
currency, a depositary for public money, and a fiscal agent for 
the government." A charter was granted the bank, to run for 
twenty years. The bank lasted from 1791 to 1811. 

The first United States Bank had a capital of $10,000,000 
divided into 25,000 shares. The government held one fifth of 
the shares. The others were subscribed for by private individ- 
uals and were paid for, one fourth in coin and three fourths 
in government bonds. 

The management of the bank was placed in the hands of the 
shareholders resident in the United States. It was supervised 
by the Secretary of the Treasury. It established branches in 
nearly all the leading cities. Its circulating notes reached 
the value of about one half of the capital. 

The bank was a success, and when it went into liquidation, 
the shareholders received $434 for each $400 share. At the 
expiration of the twenty years, the charter was not renewed. 

In 1 81 6 the second United States Bank was estabKshed, the 
charter again to run for twenty years. The capital was fixed 
at $35,000,000, one fifth to be subscribed by the government. 
Five of the twenty-five directors were to be appointed by the 
government. Public moneys were to be deposited in the bank, 
although the Secretary of the Treasury had the power to deposit 
in other banks. Branches were to be established everywhere. 
*' The bank acted as agent of the Treasury, taking charge of 



196 HISTORY OF BANKING 

all loan negotiations and performing various duties free of 
charge." (Handy, Banking Systems of the World.) 

The second United States Bank came under the influence of 
politics, and its management was dishonest and disorderly. In 
spite of this, it had a beneficial effect on banking methods, 
and restored the credit of the nation, which had been jeopard- 
ized by the irresponsible practices of the state banks. The 
bank was violently opposed by the state banks, which resented 
its efforts to curb their speculative mania. By the order of 
President Jackson (1833), the government deposits were with- 
drawn from the bank to be deposited in favorite state banks. 
When the time came to renew the charter, a renewal was voted 
by Congress but vetoed by the President. (Cf. E. B. Andrews, 
History of the United States, vol. I, pp. 328, 357.) 

The first and second United States Banks served as the fiscal 
agents of the government, furnished an adequate currency, 
regulated the note issue of other banks, and equalized the rate 
of money over the country. 

A deep-seated prejudice existed, however, against a central 
government bank such as was the United States Bank. As 
representing a principle, it was held to be opposed to the prin- 
ciple of states' rights, to be a concentration of unlimited power in 
the hands of a few, to be the most perfect and most powerful 
trust that could be invented for the favoring of its own crea- 
tures and the destruction of its opponents, to be the contri- 
vance of a party that sought a federation and a centralization 
of power, to be a measure opposed to the Constitution of the 
United States. 

In the popular opinion, " the bank stood for the aristocracy, 
for distinction of classes, for the creditor as against the debtor, 
for the bondholders and the people of leisure." (R. T. Steven- 
son, The History of North America, vol. XII, p. 261.) 

The hostile attitude of the people was manifested most em- 
phatically against the second United States Bank. " From the 
day its doors were opened for business, the bank had been the 
object of bitter hatred by a large part of the people. Polit- 



INDEPENDENT TREASURY SYSTEM 1 97 

ical leaders had denounced its charter as unconstitutional. 
The press had described it as a hydra-headed monster, as a 
grinding monopoly which oppressed the state banks, robbed the 
people, made money dear, drew specie from the West, and caused 
the hard times of 1819." (McMaster, History of the People of 
the United States, vol. VI, p. i.) 

The Bank had twenty-five branches throughout the states, 
but several states strove to drive the branches outside of their 
confines. 

The rechartering of the Bank became a national political 
question in 1832, and Jackson, who opposed the charter, received 
the popular vote 687,502 against Clay's 530,189. The elec- 
toral vote stood 219 to 49. 

The Supreme Court had pronounced the Bank charter con- 
stitutional in 1 81 9, but Jackson declared that " the opinion of the 
judges has no more authority over Congress than the opinion of 
Congress has over the judges ; and on that point the President 
is independent of both," — an assertion fraught with the gravest 
danger to the principle of American government. In his veto 
of the bill rechartering the Bank, he declared that some of the 
powers of the Bank " were unauthorized by the constitution, 
subversive of the rights of the states, and dangerous to the 
liberties of the people," denounced it as a monopoly under the 
control of capitalists, many of whom were foreigners, a colossal 
money power which, with its enormous political influence, 
" might make us tremble for the purity of our elections in peace, 
and for the independence of our country in war." (D. H. 
Montgomery, The Student's American History, p. 321.) ''The 
[veto] message was a compound of virile argument, bungling 
economics, and dexterous appeals to the masses. In it the 
President put Americans against foreigners ; the poor against 
the rich ; the West against the East ; and the people against 
privilege. In the main he drove straight to the center of popu- 
lar prejudice, and won." (R. T. Stevenson, History of North 
America, vol. XII, p. 292.) 

2. Independent Treasury System. — In 1837 the system 



198 HISTORY OF BANKING 

known as the " Independent Treasury System " was advocated, 
but was not finally adopted until 1846. The United States 
Treasury became the custodian of its own funds, and this system 
has prevailed down to our own time, although somewhat modi- 
fied so as to allow the deposit of a certain part of the national 
moneys in specified national banks throughout the country. 

3. State Banks. — The state banks had been estabhshed eren 
before the establishment of the first United States Bank in 
1 791. In 1 781, the first real bank was established in Phila- 
delphia. The Bank of Massachusetts was established in Massa- 
chusetts in 1784. Other banks soon followed in that state, 
and in 1805 the first law to regulate banking was passed. In- 
cited by the success that attended the United States Bank, 
state banks were started in nearly all the states. 

During these early years, banking was in a deplorable con- 
dition. There was little or no restraint and little or no super- 
vision. There existed a mania for issuing circulating notes, 
and the amount of issue was seldom restricted to any propor- 
tionate amount of money held by the banks. The country was 
flooded with bank notes, which owed their credit merely to the 
standing of the banks that issued them, and as the standing 
of many of the banks was very precarious, some having issued 
their notes without any capital at all and without any inten- 
tion of redeeming them, the notes differed widely in value, and 
there was no security in monetary transactions. In 181 1, 
there were $46,000,000 of bank notes in circulation. During 
the war with England (1812-1815) $110,000,000 of such notes 
were in use. 

The second United States Bank was established by Congress 
in 1 81 6 to remedy to some extent the evils then existing. 

After the liquidation of the second United States Bank (1836), 
the state banks remained the only system of banking. In 1837 
there was a suspension of specie which brought ruin to many 
banks. Banking continued in an unhealthy condition owing to 
the little restraint on the issue of bank notes and to the slight 
supervision of the state governments over the banks. 



STATE BANKS 1 99 

In several states efforts were made to remedy the evils of 
banking. In Massachusetts, the " Suffolk Bank System " was 
adopted. The name is derived from the fact that the Suffolk 
Bank led in the movement. 

'' The Suffolk Bank, with the cooperation of six other banks 
of Boston, organized a clearing house for notes of outside in- 
stitutions, by establishing a redemption fund in the Suffolk 
Bank. The banks w^hich entered the system would have their 
notes received at par in Boston, the financial center, and would 
be called upon for redemption only at specified periods by the 
Suffolk, which w^ould receive in redemption, also at par, any 
notes of banks in good standing in lieu of specie." (A. B. 
Hepburn, Contest for Sound Money, p. 92.) 

The effect of the system was to restrain circulating notes 
within reasonable limits. It served to lessen the disaster to 
New England banks in the panic of 1837. 

New York also strove to provide a remedy against the general 
disorder of banking. In 1829, the '' Safety Fund System " was 
adopted by statute. It required banks to contribute to a joint 
fund for the redemption of notes and payment of deposits of any 
of their number which should be overtaken by disaster. Each 
bank contributed annually a certain amount to the fund until 
the contribution amounted to 3 per cent of the total bank capital. 
The system, though good in itself, failed on account of defects 
in details and careless enforcement of its provisions. 

In 1838, New York passed the '' free banking " law. It pro- 
vided " that anybody might form a bank and issue notes without 
receiving a charter from the legislature, as had been the custom 
in the past. But these notes must be based on United States 
bonds, or bonds of the various states (subsequently limited to 
New York bonds) , or approved real estate mortgages, which se- 
curities were deposited with the state as security." (Handy, 
Banking Systems of the World, p. 16.) 

Similar law^s were passed in other states. The theory was 
good, but much depended on the enforcement of the laws, as 
well as upon the nature of the laws. 



200 HISTORY OF BANKING 

As a result of inadequate laws and the non-enforcement of 
laws, the business of banking remained in a very unsettled 
condition throughout the country, although here and there 
might be found cases of good and honest business management 
and sound banking laws. As a rule, however, there was insta- 
bility in the currency, many failures of banks, and much loss 
and suffering among depositors. 

A. B. Hepburn, in his Contest for Sound Money, thus gives 
a general review of '' Banking conditions for the whole period 
of national existence prior to the Civil War : — 

'^ I. First United States Bank (1791-1811) — Sound bank 
currency. 

"2. Interval (1812-1816) — State bank currency inflation, 
suspension, disasters involving enormous losses. 

'* 3. Second United States Bank (181 7-1836) — At first un- 
settled conditions as to currency and business, then sound paper 
currency by reason of United States Bank enforcing redemption 
of state bank notes, and formulating a standard of credit to 
which the state banks in competition were obliged to conform ; 
then during last years of its existence unsettled conditions owing 
to political power exerted to prevent renewal of bank's charter. 

'' 4. 1837-1846 — Inordinate inflation, suspension and losses 
measured by the hundred millions, withdrawal of government 
funds from the banks, with the declared hope of preventing 
undue expansion of bank note issues by so doing. 

" 5. 1847-1860 — Banking becoming more conservative; de- 
posits counting more and note issues less as a means of extending 
credit ; note issues, however, unrestrained and entailing enor- 
mous losses upon the people ; failure of subtreasury to restrain 
or control banking methods, but disastrously interfering with 
business by withdrawing from the channels of trade and lock- 
ing up funds which should be current." (p. 169.) 

4. National Bank System. — Constitution and Growth. — The 
national bank system was introduced by law of Congress, Feb. 
25, 1863. It owed its origin to the Civil War. Its main 
object was to secure a market for United States bonds, so 



NATIONAL BANK SYSTEM 20I 

that the government might get money to defray the heavy 
expenses of the war. 

The organization of national banks has been described on a 
preceding page. As there mentioned, the banks were obKged 
to invest a certain proportion of their capital in United States 
bonds. They were allowed to issue bank notes up to 90 per 
cent of their bond investment. The limit of the whole issue 
of circulating notes was fixed by the laws of 1863 and 1864 
at 300 millions of dollars. In 1870 the limit was raised to 
354 millions, and in 1875 all limit was removed. 

On March 3, 1865, a 10 per cent tax was imposed on the 
note issues of all banks not national banks, and this tax, by 
practically prohibiting the circulating notes of state banks, 
caused many of them to secure national bank charters. 

By an Act of June 20, 1874, a national bank redemption bu- 
reau in the Treasury Department in Washington was authorized. 

Other laws affecting the system were made, until the law of 
March 14, 1900, finally determined the status of national banks 
for the next thirteen years. By this act, the minimum capital 
in a place having 3000 or less inhabitants was fixed at $25,000; 
the amount of circulating notes that could be issued by any bank 
was fixed at the par value of the United States bonds held by 
the bank instead of 90 per cent of such bonds as before ; the tax 
on circulating notes was reduced from one per cent per annum 
to one half of one per cent per annum on all bonds paying 2 
per cent interest. The 2 per cent bonds were instituted in 
1900 by consolidating the 3s of 1908-19 18, the 4s of 1907, and 
the 5s of 1904 into what are called Consols of 1930. 

The growth of national banks was at first slow, but after 
the passage of the law of March 3, 1865, imposing a tax of 
10 per cent on the note issues of all other banks not national 
banks, and especially after the law of March 14, 1900, the 
activity and growth of national banks was remarkable. Shortly 
after the former act, over $400,000,000 worth of United States 
bonds were held by the national banks, and in a few years after 
the act of 1900, the number of national banks increased by 691. 



202 HISTORY OF BANKING 

Defects of the National Bank System. — The national bank 
system had for fifty years the sanction of the United States 
government. It was the banking system which obtained in this 
comitry as contrasted with the single bank system w^hich ob- 
tains in other countries. As a banking system, it was never 
a complete success, and for some years prior to 1913 the de- 
mand for some kind of reform became more and more insistent. 

The main objections advanced against the national bank sys- 
tem may be summarized under the following heads : its Origin, 
the Isolation of the Several Banks, Depositing of Reserves, 
the Congestion of Money in Money Centers, the Independent 
Treasury System, Inelastic Currency, and Lack of Banks in 
Many Districts. 

1 . The national bank system was the result of an emergency, 
— the government's need of funds and of a market for its bonds. 
The government had need of money to carry on the Civil War, 
and the state banks then in existence did not want the govern- 
ment bonds, which were fluctuating in value with every victory 
or defeat of the war. In 1863 the national banks were estab- 
lished with the obligation of taking a certain proportion of the 
government bonds. A banking system, if it would pretend to 
soundness and efficiency, ought not to be the outgrowth of a 
temporary necessity. It should be the result of a selective 
experience, of long and careful investigation and study of the 
special needs of the country. 

2. Each bank was an independent unit, having its own in- 
terests distinct from the interests of all other banks, competing 
wdth its neighbors, and often ready to sacrifice its neighbors 
to save itself. There was no union whereby mutual support 
and aid might be extended from the stronger to the weaker 
in time of trouble. There was no community of interests that 
would serve to bind all together in one perfectly consolidated 
system, making the interests of one the interests of all, and 
inciting each to watch over the honor and integrity of the 
others. 

Owing to this isolated character of the banks, a scheming 



DEFECTS OF THE NATIONAL BANK SYSTEM 203 

operator might have his notes discounted in different banks, 
without any one of the banks knowing about the accommodation 
granted by the others. When one bank, becoming aware of the 
flimsy nature of the security offered, called in its loan to a 
borrower, the borrower might pay back the loan with money 
borrowed from a second bank on similar uncertain security. 
Usually the first bank cared very little where its money came 
from, and was equally unconcerned about the risk incurred by 
the second bank, which might also grant the loan on unsafe 
collateral. 

Again, in time of stringency, each bank would seek to draw 
in its own reserves, and in doing so it might often expose to 
imminent danger other banks that held these reserves. Each 
bank would naturally seek its own salvation, and would strive 
to increase its cash fund at the expense of every other bank. 

3. Under the national bank system, up to 19 13, the reserves 
of country banks could in great proportion be placed in reserve 
city banks, and half of the reserves of reserve city banks could 
be placed in central reserve city banks. This method of holding 
reserves presented no serious difficulty in an emergency or a 
money stringency which affected only a portion of the country 
or the banks of one city. In such a case, if a country bank 
in one town needed money, it might call on the reserve it had 
in the reserve city bank, and the money would be forthcoming 
and the difficulty would be tided over. But if the stringency 
affected a whole section of the country or the entire country, 
then, when the demand was made by country banks, the reserve 
city banks would lose much of their deposits and become so 
much weaker. They in turn would call on the central reserve 
city banks for the portion of their reserves deposited there, 
and the central reserve city banks would lose much of their 
deposits and become so much weaker. Thus, the weakening proc- 
ess would continue until the whole banking system was affected. 

Indeed, that the reserves deposited in other banks could not 
properly be called reserves at all was the opinion of many au- 
thorities on finance. The panic of 1907 illustrated this fact. 



204 



HISTORY OF BANKING 



" The Western banks, having large deposits in New York banks, 
began to draw against the latter, thereby diminishing the re- 
serves of the New York banks ; but, as the latter needed their 
own reserves quite as much as the Western banks needed theirs, 
the money stringency in New York soon reached the breaking 
point, and all the New York banks suspended cash payments. 
From the moment that such suspension took place, the deposits 
of the Western banks were of no use to them as reserves." 
(M. W. Hazeltine, " The Banking and Currency Problem in the 
United States," in North American Review, Feb., 1909.) 

4. The reserve law w^hich allowed banks to deposit a portion 
of their reserves in other banks caused a congestion of money 
in great money centers, and left the country banks devoid of 
the funds necessary to carry on business. These reserves de- 
posited in other banks bore interest, and it was to the ad- 
vantage of the country banks to deposit their money in the re- 
serve banks, but the result often followed that business men 
in those country communities found it difficult to get the credit 
necessary to do business. 

A view of the per capita capital existing in the various states 
at any one time will illustrate this fact. In 1896, the per capita 
capital in the national banks in several states was as follows : — 



Maine . . . 
New Hampshire 
Vermont . 
Massachusetts 
Rhode Island 
Connecticut . 
New York 



(Cf 



45.88 


Pennsylvania . 


41.85 


North Carohna 


53-34 


South Carolina 


120.59 


Georgia . . 


117. 21 


Alabama . . 


80.31 


Mississippi . . 


86.18 


Arkansas . . 



Handy, Banking Systems of the World 



$60.61 
4.98 

5-35 
6.12 
6.25 
2.56 
2.72 



It is true that since 1896 there had been an increase in the 
number of national banks, the lowest amount of capital stock 
required having been reduced from $50,000 to $25,000. Yet the 
evil continued to exist. 

5. The treasury system adopted in 1846 and followed under 



DEFECTS OF THE NATIONAL BANK SYSTEM 205 

the national bank system allowed the United States government 
to store away in its main treasury vaults in Washington and in 
the subtreasuries throughout the states a great mass of its 
wealth. The proceeds of taxation were thus abstracted in great 
measure from commercial uses. The people were deprived of the 
use of the money. 

This system has been called a " revival of primeval times," 
when the barons stored their wealth in their castle vaults. 
The amount of money thus locked up and kept out of circula- 
tion averaged in past years $50,000,000. Had this sum been 
deposited in the banks instead of being kept in the treasury 
vaults, it would have been no less safe, for it might have been 
secured as other government deposits were secured. Had the 
government received even a 2 per cent interest on those sums, 
it would have been benefited to the amount of millions of 
dollars, and the banks would have had at their disposal for 
commercial credits a sum that would have allowed them to in- 
crease their loaning capacity to the extent of hundreds of 
millions of dollars. {Practical Problems in Banking and Cur- 
rency, pp. 184, 204.) 

6. The amount of money needed in circulation is a variable 
quantity. It will depend on the condition of trade and the ex- 
tent of commercial transactions. The amount of money in a 
country may be great, but not all of it enters into circulation. 
Much of the actual money of the country is stored away in the 
government treasury, or in banks, in the form of reserves. Nor 
is actual money always needed for commercial transactions, 
since trade is carried on mostly through credits and credit 
loans supplied by the banks to the merchants. 

It is stated on good authority that 92 per cent of all the 
business that passes through banks is done by means of credit. 
This statement is substantiated by reference to the operations 
of the clearing hpuses of the country, in which the balances 
settled in actual cash sum up about 8 per cent of the total yearly 
clearings. (Cf. Practical Problems in Banking and Currency, 
p. 227.) 



2o6 HISTORY OF BANKING 

Now, under the national bank system, in June, 191 2, for ex- 
ample, the actual amount of money in circulation was : 

Gold Coin $ 610,724,153 

Gold Certificates 943,435,618 

Silver Dollars 7o,339,574 

Silver Certificates 469,224,400 

Subsidiary Silver Coin 145,034,198 

Treasviry Notes of 1890 2,915,570 

United States Notes 337,697,321 

National Bank Notes 705,142,259 

$3,284,513,093 

(Annual Report Seer. Treas., 1912, p. 152.) 

Per capita — $34-34- 

It was with this amount of money or with that part of it 
which was not tied up or used for other purposes, that the 8 per 
cent of cash business was carried on. The rest was done by 
credit. 

Of the several items enumerated in the list, gold and silver, 
the Treasury notes, and the United States notes are fixed and 
determined. They cannot readily be increased or diminished. 
The national bank notes alone were capable of elasticity, and 
they should be susceptible of expansion and contraction in 
response to commercial needs. The banks stand midway be- 
tween the money source and the merchants, and are necessarily 
in constant and close touch with commerce, through supplying 
loans, credits, discounts, and exchange. 

Yet this very feature of elasticity was wanting in the na- 
tional bank notes. The notes were based on United States bonds, 
in which each bank was obliged to invest a certain proportion 
of its capital. Now, the banks invested in bonds and issued 
notes against them, not through a desire to help trade or be- 
cause of the needs of commerce, but because of the profit to be 
gained by the bond investment. {Practical Problems in Bank- 
ing and Currency, p. 193.) To quote Horace White: "The 
principal defect of our national bank system is the rigidity 
of its note circulation. In a broad sense, the volume of notes 



DEFECTS OF THE NATIONAL BANK SYSTEM 207 

is regulated, not by the wants of trade, not by the amount or 
kind of commercial paper offered for discount, but by the mar- 
ket price of United States bonds." {Ih., p. 266.) 

At the beginning of the national bank system, bonds were a 
good investment, as their value was constantly increasing and 
they paid 5 or 6 per cent interest. The banks readily invested 
in them and the circulation of notes was large. Later, upon the 
redemption of these bonds, the circulation fell away. It in- 
creased again upon the issue of new bonds. 

In the past, many banks drew their circulation down to the 
minimum required by law, '' seeing more profit in selling the 
bonds at the premium they have commanded than in continuing 
circulation against them." (J. B. Forgan, in Practical Prob- 
lems in Banking and Currency, p. 311.) 

Moreover, the issue of notes secured by government bonds was 
open to the further objection that it is unwise to make the 
chief security for note circulation the security of the govern- 
ment. In case of war, the bonds representing the debt of a 
country are susceptible to violent depreciation. The United 
States bonds might fall very low. In the Boer war, the English 
Consols fell from 114 to 92. In the Civil War, the United States 
bonds could find no buyers, and the government had to organize 
the national bank system to create a market for them. Again, 
contemporary history shows how the values of all American se- 
curities, bonds included, fluctuate upon the agitation of every 
irhportant political movement, such as the silver question, 
or revision of the tariff. The security and the solidity of 
government bonds as the basis of circulation were thus brought 
into doubt. 

But to return to the question of elasticity. While the money 
circulation was rigidly fixed, the factors that created the de- 
mand for money were constantly growing or were subject to 
fluctuations. Among such factors were population, trade, 
and the seasonal demands for money incident to the moving of 
crops. It is evident that the circulating currency should be 
capable of expanding and contracting in pace with these factors. 



2o8 HISTORY OF BANKING 

Yet, the national bank circulation did not moA^e with popu- 
lation, nor with the great expansion of trade, for while both 
these factors had increased immensely during the period when 
the national bank system was in force, there had been no cor- 
responding increase in note circulation. The circulation, as 
we have seen, was mainly determined by factors wholly differ- 
ent from the factors here mentioned. 

Again, every year a great strain w^as felt at crop-moving 
time, when immense sums of money were taken from the East to 
the South and West. In 1906, $200,000,000 was sent from the 
East to the West and South during the crop season. It was 
stated that Wall Street banks shipped 30 to 40 millions of cash 
to the West and South every fall. (Cf. Nat. Mon. Com., Doc. 
No. 588.) During recent years, the government has in part sup- 
plied the demand of agricultural regions by placing deposits 
of government money in western and southern banks. 

Owing in great measure to the inexpansive nature of the cir- 
culating medium, this country has had its periodic panics. 

Commercial crises came about upon the refusal of banks to 
give bank credits to merchants, and the banks were forced to 
refuse to give these credits or make further loans whenever 
their reserves reached the limit fixed and defined by law. 

Monetary crises were experienced in i860, 1873, 1884, 1890, 
1893, and 1907. The banks were unable to render aid to the 
merchants and to prevent the many failures that spread over 
the country. The banks were obliged, in order to save them- 
selves and their reserves, to have recourse to clearing house 
certificates. These certificates were based upon the credit 
and the assets of the banks that issued them. " The amount of 
the certificates issued by the clearing house in 1893, in the prin- 
cipal cities was upward of seventy millions of dollars." (W. B. 
Dean, in Practical Problems in Banking and Currency, p. 196.) 
In New York city alone, during the crisis of 1893, the clearing 
house certificates amounted to $41,490,000. (Report Comptr. 
Cur., 1909, p. 65.) 

In the crisis of 1907, the total amount of clearing house 



REMEDIES PROPOSED 209 

certificates issued was v$248,279,7oo. New York city's issue 
reached $101,060,000. {Ih.) During the same crisis of 1907 
" some of the railroads and individual corporations issued 
checks of larger or smaller denominations in making payments 
to their employees during the period of extreme stringency and 
while hoarding was still being practiced, and some of these 
checks passed current and acted as substitutes for currency for 
the time being." . (Quotation in Rep't Compt. Cur., 1909, p. 64.) 

Just as the currency could not expand in case of stringency, 
so also it was incapable of contracting in time of slack trade. 
When the demand for money had reached a low ebb, the currency 
accumulated in the vaults of the banks, and the banks were 
tempted to resort to every scheme to put their money out to 
interest, to '^ forced loans, inflated credits, cheap rates and other 
artificial methods to keep it employed and earning some- 
thing." {Practical Problems in Banking and Currency, p. 310.) 

7. The absence of banking facilities in smaller towns and 
rural districts has long been a much felt grievance. The 
national bank system, which was not at liberty to establish 
branches, could furnish no help. The reduction of the required 
capital of banks from $50,000 to $25,000, brought some relief, 
as it caused the establishment of many banks in regions within 
the reach of farmers, who previously could avail themselves 
of banking accommodations only at the cost of great expense 
and difficulty. 

Remedies Proposed for the Evils of the National Bank Sys- 
tem. — The defects of the national bank system just enumerated 
were recognized by all students of the question, and many reme- 
dies were proposed. Some of the remedies favored the estab- 
bHshment of a central bank ; others, certain modifications of 
the actual system ; and others, again, various innovations rela- 
tive to note circulation. 

I. The most radical remedy proposed was the reestablish- 
ment of the United States Bank. The upholders of such a meas- 
ure pointed to the systems obtaining in foreign countries — 
England, France, Germany, Russia, — and insisted that this coun- 

POL. ECON. — 14 



2IO HISTORY OF BANKING 

try should adopt a system which had proved practicable and 
eminently serviceable in other lands. The experiment had al- 
ready been tried and had proved successful. 

The plan had many adherents throughout the country, even 
among prominent -bankers. The New York Chamber of Com- 
merce advocated a Central Bank. (Cf. American Review of 
Reviews, Jan., 1908 ; '' Currency Reform : A Central Bank," 
R. E. Ireton.) There was, however, considerable opposition to 
such a proposal, principally because of the fear of political in- 
fluence dominating the directors of a government bank. 

2. A scheme that resembled somewhat the principle of the 
United States Bank was suggested by Lyman J. Gage, a former 
Secretary of the Treasury. It proposed a Federated Bank with 
a capital of $50,000,000. The stock of the Federated Bank 
would be subscribed to by all the national banks of the coun- 
try. The Bank was to be controlled by a board of directors 
elected by the stockholding banks, and the government was not 
to be represented in the directory or official management 
of the institution. It was to be a bank of banks, receiving 
deposits from and doing business with its stockholding banks 
alone. The bank would exercise supervision over its stock- 
holders, order examinations of its constituent banks as need 
might require, become the depositary of all government moneys, 
and have the power to issue circulating notes against its general 
assets. It would have the power to establish branches through- 
out the country. (A. B. Hepburn, in Practical Problems in 
Banking and Currency, p. 230.) 

3. The Aldrich plan, drawn up at the suggestion of the Na- 
tional Monetary Commission (p. 218) by Nelson W. Aldrich, in 
Jan., 191 1, outlined a banking institution to be known as the 
National Reserve Association of America. It was to have its 
head office in Washington, D.C., hold all government moneys, 
and be the principal fiscal agent of the government. Only 
national banks could subscribe to the capital stock of the 
National Reserve Association. The country was to be divided 
into fifteen districts. In each district a Local Association 



REMEDIES PROPOSED 211 

was to be formed. The Local Association was to consist of at 
least ten banks, and have a capital of at least $5,000,000. 

The National Reserve Association was to be governed by a 
board of 45 directors. The Secretary of the Treasury, the Sec- 
retary of Commerce and Labor, the Comptroller of the Cur- 
rency, the Governor, and two Deputy-governors of the National 
Reserve Association were to be ex-officio members of the board. 
Each of the fifteen districts was to elect one director. Twelve 
other directors were to be elected by the banks in the fifteen 
districts subscribing to the National Reserve Association stock 
and located throughout the fifteen districts. The 27 directors 
thus elected were in turn to elect 12 more directors, " who 
shall fairly represent the industrial, commercial, agricultural, 
and other interests of the country, and who shall not be officers 
of banks. Directors of banks shall not be considered as officers. " 
(Revised edition of the Aldrich plan, Oct., 191 1.) No member 
of any state or national legislative body could become a member 
of the board. 

The Local Associations were to be governed by boards of di- 
rectors elected by the banks forming the Local Associations. 

The functions of the National Reserve Association were to be 
as follows : To receive deposits of the United States govern- 
ment and of the national banks, members of any Local Associa- 
tion, but no deposits were to be received from individuals or 
private corporations, and no interest was to be paid on deposits ; 
to purchase and sell government or state securities, securities of 
foreign governments, gold coin or bullion ; to hold the cash 
of the United States government; to transact all the fiscal 
business of the government; to rediscount notes and bills 
of exchange for the banks belonging to the Association ; to fix 
the rate of discount, which was to be uniform throughout the 
United States ; to make loans ; to deal in bills of exchange 
on foreign countries; to establish bank agencies in foreign 
countries ; to issue circulating notes. 

" All note issues of the Reserve Association must be covered 
to the extent of at least one third by gold or other lawful 



212 HISTORY OF BANKING 

money, and the remaining portion by bonds of the United States 
or bankable commercial paper as herein defined or obligations 
of the United States." The notes were to constitute a first lien 
upon the assets of the National Reserve Association. 

The earnings of the National Reserve Association were to be 
distributed as follows : The stockholding banks were to re- 
ceive 5 per cent in cumulative dividends. Of the remainder, 
part was to be paid into a surplus fund of the National Reserve 
Association until the fund reached 20 per cent of the paid in 
capital, and the rest was to go to the government. 

A weekly report w^as to be made by the Reserve Association 
to the Comptroller of the Currency. The report was to be made 
public. (See National Monetary Commission, Doc. No. 
784.) 

Other remedial plans, not so drastic as the preceding, con- 
sisted in allowing national banks to retain their original con- 
stitution, but would give them the power to establish branches, 
or would establish a government guarantee of bank deposits. 

4. The first proposal was to allow national banks to establish 
branches in the smaller towns throughout the country. The 
main bank would hold the reserves as required by law, and would 
direct the operations of its branches, sending or withdrawing 
funds as the need of trade might require. National banks are 
not at liberty to transact banking business except " at the 
office or banking house located in the place specified in their 
organization certificate." (U. S. Revised Statutes, Sec. 5190.) 
No branches are allowed in this country. 

The method of branch banking exists in most foreign countries. 
England has 129 great banks with 5500 branches. The Bank of 
France has 392 branches. The Imperial Bank of Germany has 
320 branches. Canada has 29 banks with 2200 branches. The 
ten banks of Scotland have 1065 branches. (Cf. Annals of the 
American Academy of Political and Social Science, Nov., 19 10, 
p. 60.) 

The advantages claimed for the establishment of branch banks 



REMEDIES PROPOSED 



213 



by national banks were — that it would grant banking facilities 
to districts too poor to support a bank ; it would stimulate 
enterprise in industrial pursuits ; it would absorb the capital 
that at present lies hoarded in idleness ; it would grant ac- 
commodation to customers trading in different sections of the 
country ; it would indirectly remedy the rigidity of note cir- 
culation, as the main bank could loan its notes at the branches 
and redeem them at the main office — there would be no need 
of transporting capital to the branches for the redemption of 
the notes; it would bring about a chain of mutually helpful 
banks and do away in part with the evil of isolation ; it would 
limit the amount of reserves if combination were made between 
the weaker and the stronger banks ; it would prevent in great 
measure the congestion of money in special localities ; it w^ould 
lower and equalize the interest rate of money. 

Notwithstanding these advantages, there were many who ob- 
jected to branch banking, and their objections were mainly of 
the following nature : (i) branch banks would draw away all the 
money from the small towns and use it in large cities; (2) large 
city banks would send so much money into the small towns 
through their branches and would lend at such low rates that 
existing banks could not make a living ; (3) if branches were 
permitted, all the banks would be consolidated into a gigantic 
trust, so that nobody could get any money except on terms dic- 
tated by a few powerful magnates ; (4) the branches would be 
without capital and w^ould be free of taxation. 

5. Another plan suggested was a government guarantee of 
bank deposits. It was claimed that the immediate cause of all 
money panics that ever existed was the loss of confidence on the 
part of depositors in the banks holding their deposits. In 
times of prosperity, confidence is prevalent everywhere. With- 
out hesitation individual depositors place and leave their money 
in the hands of bankers, and banks place and leave their deposits 
in reserve banks ; but let there appear the slightest indication 
of weakness on the part of any banking institution, any slightest 
indication of inability to meet demands for money deposited, 



214 HISTORY OF BANKING 

and at once a panic arises and spreads with lightning rapidity. 
A run is made on a bank ; the bank closes its doors ; the con- 
tagion spreads ; there is a scramble on the part of banks to se- 
cure their reserves, on the part of corporate and individual 
depositors to secure their deposits ; money is gathered in and 
hoarded; stagnation falls on all the financial and business 
world, and the spectacle is seen of all the banks in the country 
actually closing their doors and going out of business. Such was 
the picture offered in the panic of October, 1907. 

Now, if the evil could be met in its initial cause, if that 
cause could be obliterated, there would be no resultant evil. 
If a plan could be adopted that would do away with that pan- 
icky fear of the depositors, that wild, unreasoning dread for 
the safety of their deposits — a plan that would prevent the 
senseless scramble for and hoarding of money — that plan 
would afford a remedy for money stringencies and money panics 
siich as our country witnesses periodically. 

Such a plan, it was claimed, existed in the government guar- 
antee of bank deposits. Let such a guarantee exist, and then 
no depositor would doubt the security of his deposit, nor would 
he seek to obtain possession of it for its greater safety. 

The plan was as follows : It was proposed that all the 
national banks of the country should contribute a specified 
percentage of their average yearly deposits to a deposit guar- 
antee fund. At the end of five years enough would be contrib- 
uted to allow the guarantee feature of the scheme to become 
operative. Whenever a national bank failed, the depositors 
would be paid in full out of the guarantee fund. The Comp- 
troller of the Currency would take over the estate of the failed 
bank and liquidate its affairs. Whatever assets were possessed 
by the bank would be used to pay the cost of settlement, and to 
make good the draft made upon the guarantee fund. {The 
American Review of Reviews, Mar., 1908, " Shall Bank Deposits 
be guaranteed? " General A. B. Nettleton, p. 343.) 

Certain accessory legislative measures would be required 
to safeguard the united interests of all the banks, such as 



REMEDIES PROPOSED 21 c 

limitation of the maximum amount of deposits any one bank 
could receive in proportion to its unimpaired capital ; limitation 
of the rate of interest payable on deposits, with a view to pro- 
tect conservative banks from unfair competition of smaller and 
unscrupulous banks ; the prevention of chains of banks under 
one ownership, and of the borrowing of banks' funds by officers 
of the banks ; the elimination by the Comptroller of dishonest 
and incompetent bank officials. 

The main objections made against the system were the follow- 
ing : (i) It would tend to make the national banking system a 
huge political machine, leading to favoritism and concentra- 
tion of power in the federal government. (2) It would savor of 
paternalism and socialism, repressing individual effort. (3) It 
would put good and bad banks on a level and destroy all incen- 
tive for sound banking and efficient management. (4) That the 
banks needed no guarantee was shown by the fact that deposits 
of failed banks since the beginning of the national bank sys- 
tem had aggregated only one twenty-sixth of one per cent of 
all the deposits of the banks. (5) It would lead the way to bad 
banking, since it would impair the feeling of individual respon- 
sibility, and would encourage depositors to make no discrim- 
ination between sound and unsound banks, thus destroying 
the force of the popular demand for careful management and safe 
methods — the government being bound to make up the losses 
incurred by unwise and haphazard operations. (6) It would be 
unjust to make strong and sound banks responsible for unsound 
and weak banks, without at the same time giving the strong 
banks any power of control or direction over the weak banks. 

Various remedies affecting the issue of circulating notes were 
proposed in an attempt to make the circulation more elastic 
and responsive to the demands of trade. The remedies related 
to asset currency and emergency currency. 

6. The general feature of the many forms of asset or credit 
currency proposed was that banks should have the power to issue 
notes based not on United States bonds, but on the assets of 



2i6 HISTORY OF BANKING 

the banks. There were usually several safeguards attached, 
such as the establishment of a guarantee fund contributed by 
each bank proportionately to its capital or to its issue of notes, 
the obligatory redemption of notes by each bank when presented, 
a tax- on the notes increasing with the increasing amounts of 
the notes issued, the making the notes a first lien on the assets 
of the bank and upon the stockholders' liability. 

Credit currency, with various modifications and greater or 
less limitations, had been proposed by the Indianapolis Mon- 
etary Commission, convened previously to 1900, by the Ameri- 
can Bankers' Association Commission, assembled in Washington, 
D.C., in 1906, by the Fowler bill and other bills in Congress, by 
Secretary Gage of the Treasury in 1897, and by a host of prom- 
inent bankers and financiers. 

The advocates of asset currency pointed out the fact that 
foreign - countries have adopted this method. The Bank of 
France, the Bank of Austria-Hungary, the Imperial Bank of 
Germany, the Bank of Belgium, the Bank of the Netherlands, 
the Bank of Scotland, the Canadian banks, and many others, all 
issue circulating notes on their business assets. {Practical 
Problems in Banking and Currency, p. 203.) 

It was further argued that much of the business of banks 
was already done through credit instruments, cashiers' certifi- 
cates, certificates of deposit, drafts, and checks. A currency 
founded on assets is founded on the natural resources of the 
country and is fitly called a natural currency. It was declared 
to be the only scientific method of banking, because " the cir- 
culating medium is the instrument of business transactions, 
and should be developed out of them and governed by them." 
{Ih., p. 201.) 

Such a currency would be certain of payment, because safe- 
guarded by a guarantee fund ; it would sever the relation be- 
tween the currency circulation and the government, because the 
note circulation would no longer be based on government bonds ; 
it would set the circulating notes free from the influence of the 
political operations of the government and the market price 



REMEDIES PROPOSED 217 

of government bonds. (Cf. W. B. Dean, in Practical Prob- 
lems in Banking and Currency, p. 201 ; cf. V. Morawetz, The 
Banking and Currency Problem in the United States; cf. North 
American Review, Feb., 1909, p. 242.) 

A currency based on bank assets would assume a certain 
amount of risk, since it is based on the probability that only a 
small percentage of banks would fail, but the past history of 
national banks would justify the assumption of the risk. It had 
been calculated that an average tax of one fifth of one per cent 
on the total note circulation in all the years since the inception 
of the national bank system would have covered all the notes 
of all the banks that failed during that period. {Practical 
Problems in Banking and Currency, p. 200.) 

Insurance companies, it was further pointed out, were doing 
business of immense extent upon the theory of probability. 
The insurance policies outstanding against any of the great 
insurance companies could not be redeemed were they to be 
presented to-morrow for redemption. Still the safety of the 
policies is not questioned, and the premiums are regularly 
paid and the insurance officers are extending their business, 
on the assumption that the lives of men will be, according to 
the law of probabilities, of a definite length on the average, 
and that accidents destructive of life will be, according to the 
same law, of only a definite frequency of occurrence. 

7. Emergency currency means a currency that would increase 
in amount in time of need, to be withdrawn after the crisis had 
passed. Several plans were proposed. They all practically 
meant the issue of notes by the banks to a certain per cent 
of the outstanding circulation, based on the assets of the 
banks or on certain safe bonds and bills receivable of the banks, 
these notes to be taxed 5 or 6 per cent yearly, to insure their 
withdrawal when the crisis had subsided. (Cf. Practical Prob- 
lems in Banking and Currency, p. 308, Pugsley's plan ; North 
American Review, Mar., 1906, p. 380, Secretary Shaw's plan.) 

An emergency currency law, known as the Aldrich-Vreeland 
Act, was passed, May 30, 1908. 



2i8 HISTORY OF BANKING 

It provided for the creation of National Currency Associa- 
tions, one such Association to be established in each city, and 
to be composed of at least ten national banks, having an aggre- 
gate capital and surplus of at least $5,000,000. 

Any bank in a National Currency Association acting through 
the Association could issue circulating notes based upon com- 
mercial paper representing actual commercial transactions. 
Circulating notes could, moreover, be issued by any national 
bank upon deposit with the Treasurer of the United States of 
bonds other than United States bonds; bonds, for example, of 
a state, a city, a town, or a county, within the United States. 

A redemption fund of 5 per cent of the additional circulating 
notes must be kept by the banks in the hands of the Treas- 
urer of the United States. To insure the withdrawal of circu- 
lating notes when no longer needed, notes based on other than 
United States bonds were taxed at the rate of 3 per cent per 
annum for the first three months, and one half of one per cent 
per annum for each additional month until 6 per cent per annum 
was reached, which rate was to continue while the notes were 
out. (See Amendment in Federal Reserve Act of 19 13.) 

The law was only a temporary measure and expired on June 30, 
191 5. It was at first thought that little use would be made of 
the provisions of the emergency law, but upon the breaking out 
of the European war in August, 1914, currency conditions be- 
came such in this country that recourse to the law was necessary 
to save the country from the serious money stringency that 
threatened. On Aug. 4, 1914, an amendment to the emergency 
act was passed giving the Secretary of the Treasury power to 
suspend certain limitations imposed by the act, and to increase 
the amount of emergency currency that could be issued by 
banks. The amount of emergency currency issued under the 
law aggregated about $380,000,000. Since the institution of the 
federal reserve system, the greater part of this currency has 
been withdrawn, owing to the low rates of discount prevailing 
at the federal reserve banks, and to the constantly increasing 
tax imposed on outstanding emergency notes. 



FEDERAL RESERVE SYSTEM 219 

By the same law of 1908 a National Monetary Commission 
composed of nine senators and nine representatives, was estab- 
lished to advise permanent amendment to the existing laws of 
banking and currency. The labor of the Commission resulted 
in the federal reserve system. 

5. Federal Reserve System. — The federal reserve system 
was introduced by the Federal Reserve Act, passed Dec. 23, 1913. 

An Organization Committee composed of the Secretary of the 
Treasury, the Secretary of Agriculture, and the Comptroller of 
the Currency was empowered to divide the territory of the 
United States into not less than eight and not more than twelve 
federal reserve districts. A federal reserve bank is insti- 
tuted in some city in each district. All the commercial banks 
within a district may become member banks of the federal re- 
serve bank. The whole system of federal reserve banks is con- 
trolled by a Federal Reserve Board, composed of the Secretary 
of the Treasury and the Comptroller of the Currency, who are 
ex-officio members, and five other members appointed by the 
President of the United States with the approval of the Senate. 

On April 2, 1914, the Organization Committee announced the 
division of territory into districts and the selection of federal 
reserve cities, as follows: District i, Boston, Mass. ; District 2, 
New York, N.Y. ; District 3, Philadelphia, Pa. ; District 4, 
Cleveland, O. ; District 5, Richmond, Va. ; District 6, Atlanta, 
Ga. ; District 7, Chicago, 111. ; District 8, St. Louis, Mo. ; Dis- 
trict 9, Minneapolis, Minn. ; District 10, Kansas City, Mo. ; 
District 11, Dallas, Tex. ; District 12, San Francisco, Cal. 

The members of the Federal Reserve Board took the oath of 
office on Aug. 10, 1914, and thereafter the organization of the 
federal reserve system was rapidly completed. On Nov. 2, 
1 9 14, the member banks paid in the first installment of capital 
stock, and, finally, on Nov. 16, 19 14, the opening of the federal 
reserve banks took place. 

The federal reserve system was instituted for the purpose 
of remedying the evils incident to the national bank system. 
A study of the history of banking and currency in the United 



2 20 HISTORY OF BANKING 

States will enable the observer to note the trend of events and 
experiences which have led to the establishment of the federal 
reserve system. The failures as well as the successes of past 
experiments, the evil as well as the good which were found in 
methods previously tried, all exerted an influence upon the minds 
of those who formulated the new system. 

The partisanship and the political influence which were ap- 
parent in, and brought ruin to, the second United States 
Bank ; the need of a responsible institution capable of becom- 
ing the fiscal agent of the government; the danger of too 
great centralization of power in a central banking system ; 
the inflation and speculation that were rampant under the con- 
trol of the state banks ; the withdrawal of money from com- 
merce that prevailed under the independent treasury system ; 
the isolated condition of the banks, inadequacy of the reserve 
system, congestion of money in reserve centers and lack of 
money in many districts, dependence of circulating notes upon 
United States bonds, and inelasticity of currency in times of 
money stringency, which were the main defects of the national 
bank system, — all of these features stood out as the lessons 
of the past and directed the selection of the provisions of the 
Federal Reserve Act. 

Under the federal reserve system, the banks are consolidated 
and made mutually helpful ; centralization of capital and con- 
gestion of money in great financial centers are avoided by the 
districting of United States territory; the withdrawal of 
funds from commerce is precluded in the provision by which 
the independent treasury system is abolished, and federal 
reserve banks are made the ordinary depositaries of gov- 
ernment moneys ; governmental responsibility for banking 
methods is secured by the presence of government officials 
and presidential appointees on the Federal Reserve Board of 
directors ; the fear of the entrance of politics and partisan- 
ship is allayed by the large number of directors on the boards 
of the federal reserve banks, and the limitations on the Presi- 
dent in the appointment of the directors of the Federal Reserve 



QUESTIONS 221 

Board ; the elasticity of the currency is sought by making cir- 
culating notes dependent on the various forms of assets held by 
the banks and representing actual commercial transactions, and 
the redemption of circulating notes by the reserve banks through 
which they are issued ; the inadequacy of the reserves under 
previous methods is remedied by the location of a certain pro- 
portion of the reserves in the federal reserve banks; the lack 
of banking facilities in many sections of the country is sought 
to be corrected by the establishment of branches of federal re- 
serve banks in various cities throughout each federal reserve 
district, whereby the benefits of the central banks may be more 
largely diffused. 

QUESTIONS 

1. When and where did banking originate in the world? Mention 
the principal banks of earliest times. What countries have government 
banks ? 

2. Describe the first Bank of the United States; the second Bank of the 
United States. 

3. What is the independent treasury system ? When did it begui ? 

4. Give a brief account of state banks in the United States. 

5. When did the national bank system begin ? What was the cause 
of the institution of the national bank system? 

6. Enumerate the defects attributed to the national bank system. 

7. Explain each of the defects in detail. 

8. What remedies were proposed for the alleged evils of the national 
bank system ? 

9. Explain each remedial measure in detail. 

10. WTien was the federal reserve system instituted? Mention the 
federal reserve cities. WTien were the federal reserve banks opened? 

11. How has the federal reserve system sought to remedy the defects 
of previous banking systems ? 



CHAPTER XII 

POSTAL SAVINGS BANKS. LAND BANKS. BANKING 
SYSTEMS OF SOME OTHER COUNTRIES 

Postal Savings Banks. — The government already has an ad- 
mirable system of collecting and distributing the mail. There 
is a post office in every corner of the United States possessions, 
directed by competent officials, who are responsible to the 
United States government and for whom the United States 
government is responsible. The establishment of postal savings 
banks adds to the duties of these many officials the duty of 
receiving the deposits of the people. 

The system was first introduced in England in 1861, and since 
that time it has been adopted by nearly every nation of the 
world. The United States adopted it in 19 10. 

The following table shows the activity of the system in the 
principal foreign countries : — 



Country 



United Kingdom 
Canada . . . 
France . . . 
Italy .... 
Belgium . . . 
Russia . . . 
Japan . . . 
Austria . . . 
Hungar}' . . 
Netherlands 
Sweden . . . 



Date 



1912 
1912 
1912 
1912 
1908 
1907 
1912 
1912 
1912 
1911 
1912 



Number of 
Depositors 



12,370,646 

146,310 

5,970,929 

5,777,206 

2,200,000 

1,788,000 

11,950,158 

2,261,658 

823,251 

1,540,481 

565,759 



Deposits 



$859,027,319 

42,683,232 

328,890,226 

361,433,560 

141,000,000 

128,000,000 

91,896,942 

46,317,746 

23,653,855 
66,857,424 
12,645,957 



Year when 
Established 



1861 
1868 
1881 

1875 
1870 
1889 

1875 
1883 
1886 
1881 



(Nat. Mon. Com., Doc. No. 658; Stat. Abstr., 191 2, p. 811.) 

222 



POSTAL SAVINGS IN EUROPE 223 

The system works well where introduced. It encourages 
thrift and the spirit of saving among the classes, even among 
the poorest, since deposits are invited from all sorts of persons. 
Because the government guarantees the safety of the deposits, 
the system appeals to the great mass of the people, who have 
absolute trust in the government, when they might become sus- 
picious of even the most solidly founded private corporation. 

The sum with which a deposit may be started is very small, 
— a shilling in England, a franc in France, — but provision 
is made for even the smallest sums by the issue of cards to 
which stamps of the value of the smallest current money may 
be affixed, and when the stamps amount to about twenty cents, 
the cards may be deposited and an account opened. In Austria, 
over half the depositors are under twenty years of age. In 
England, 50 per cent are women and children. (Cf. Annals of 
the American Academy of Political and Social Science ^ Nov., 
1910, p. 174.) 

In England and France, the funds collected are invested in 
government bonds. In other foreign countries, the funds may 
be invested in other than government bonds ; for example, in 
municipal bonds, or in mortgages on real estate. 

For some years the question of the establishment of postal 
savings banks in the United States was frequently discussed. 
The adoption of the system appealed to the people, and in the 
presidential election of 1908 the platforms of all the parties 
advocated the measure. 

Soon after the election, the subject came up in Congress, 
and, after much discussion, the Postal Savings Bank Act be- 
came a law, June 25, 1910. 

The Act instituted a Board of Trustees composed of the Sec- 
retary of the Treasury, the Postmaster-general, and the At- 
torney-general, which makes all rules and regulations for 
carrying out the law. 

The Postmaster General designates the post offices which may 
become depositaries of postal savings. (See Amendment, Aug. 
24, 1912.) 



2 24 POSTAL SAVINGS BANKS 

Any person may deposit in the postal savings banks sums not 
less than one dollar. Stamps, however, are provided for 
smaller sums. 

Deposits by any individual may reach the sum of $2500 
(Amendment of 19 18). Interest on the sums deposited is paid 
at the rate of 2 per cent per annum. Deposits are payable on 
demand. 

The money deposited in postal banks is redeposited prefer- 
ably in member banks of the Federal Reserve System in the 
locality where the postal-savings are made, but if member banks 
do not exist in the locality, or, if existing, refuse to receive the 
deposits, then the deposits may be placed in any bank in the 
locality or in a bank most convenient to the locality, after such 
bank has qualified to receive the deposits. Funds so deposited 
draw 2-|- per cent interest. (lb.) 

Five per cent of the deposits in postal banks is retained in 
the national treasury as a reserve fund. Thirty per cent may be 
invested by the Board of Trustees in government bonds, and the 
whole amount of deposits may be invested in government bonds 
at the discretion of the President. 

Depositors in postal banks have the privilege of exchanging 
their deposits in amounts of $20 and multiples thereof for 2-J 
per cent United States postal-savings registered or coupon bonds. 
Such bonds are not counted as a part of the maximum of $2500 
allowed to a depositor. The bonds are bought at par and are 
redeemable at par. 

The most evident advantages of the postal savings bank sys- 
tem are as follows : 

1. It furnishes a safe means for the small savings of the 
poorer classes. 

2. It encourages the spirit of saving by reducing to the mini- 
mum the obstacles and inconveniences that prevent saving. 

3. It prevents hoarding and brings into circulation an im- 
mense amount of money needed for commercial transactions. 

4. It tends to encourage persons to put money in savings 
banks, for when the habit of saving is formed and a rather 



ADVANTAGES 



225 



large sum has been collected in the postal savings bank, the 
depositor may be induced by reason of the higher rate of in- 
terest paid by the savings bank to transfer his deposit to the 
latter institution. 

5. If, in time of panic, money be withdrawn from other 
banks, some of it will in all probability be placed in postal 
savings banks. This can be returned to the banks by the 
government, and money will flow back into circulation, thus 
possibly preventing a money stringency. 

The postal savings bank system has spread rapidly over the 
whole country. On June 30, 1920, there were 6314 postal savings 
depositories. The number of depositors reached 508,508, and 
the amount of deposits, $157,276,322. 

A noticeable fact, since the introduction of the system, is that 
the amount of money sent abroad for deposit in foreign postal 
banks has considerably diminished. 

Federal Land Banks and Joint Stock Land Banks. — The Fed- 
eral Land Banks and the Joint Stock Land Banks were estab- 
lished to help the farmers. For a long time the farmers and 
would-be farmers were subjected to many inconveniences in their 
efforts to improve or to acquire land. Exorbitant rates of in- 
terest were charged by banks for the money advanced to farmers 
for the marketing of farm products. Land monopolies through 
their large capital funds secured possession of the best lands, 
and many prospective farmers with small capital found it im- 
possible to acquire land. To stimulate agriculture, to encourage 
cooperation among farmers, and to enable persons with little 
money to own and to cultivate land, the Farm Loan Act was 
passed on July 17, 1916. 

A Federal Farm Loan Bureau under the supervision of a 
Federal Farm Loan Board was established in the Treasury De- 
partment. 

The continental United States, excluding Alaska, was divided 
into 12 districts, and in each district was organized a Federal 
Land Bank with a capital of $750,000. 

The Federal Land Bank loans money to bona fide farmers on 

POL. ECON.— 15 



226 LAND BANKS 

first mortgages on farm land within the district. The loan, 
however, is made not directly to the individual farmer but 
through the intermediary of National Farm Loan Associations, 
which are formed within the district. Ten or more borrowers 
form an association and subscribe to the capital stock of the 
association. The association indorses the loan applications and 
subscribes to the capital stock of the Federal Land Bank. The 
loan is made by the bank to the association and through the 
association to the individuals who are shareholders in the asso- 
ciation. The loan, which may be for not less than $ioo and not 
more than $10,000 to any one borrower, is made for not more 
than 50% of the value of the land, must be used for agricultural 
purposes exclusively, and is payable through an amortization plan 
in a period of not less than five and not more than forty years. 

The funds that supply the loans are obtained in part by the 
deposits of the farmers and associations in the Land Banks, and 
in part by the sale of Farm Loan Bonds. 

The bonds are secured by the capital, reserves, and earnings 
of the issuing bank and of all the other Land Banks, as well as 
by the indorsed first mortgages on farm lands equal at least in 
amount to the bonds issued. The bonds are non-taxable, and are 
a legal investment for trust funds and security for public deposits. 

Joint Stock Land Banks, with a capital of $250,000, can make 
loans to farmers on first mortgages and can issue bonds. The 
loans made by the Joint Stock Land Bank are not subject to the 
conditions imposed on loans granted by the Federal Land Banks. 
The individual may obtain a loan on first mortgage directly 
from the Joint Stock Land Bank without joining a National 
Farm Loan Association, and is not restricted in the use of the 
loan, the location of the farm land, the method of payment, 
or the amount of the loan. 

The progress made by the system since its inception to Sept. 30, 

1920, is shown by the following: — 

Number Amount 

Net Loans applied for 177,019 $540,578,500 

Net Loans approved 139,189 383,234,988 

Loans closed 130,720 366,646,914 

(Treas. Depart. Federal Farm Loan Bureau.) 



BANKING SYSTEMS OF SOME OTHER COUNTRIES 2 2 7 

As is evidenced by the preceding table, the Land Banks have 
proved a great benefit to the farmers. 

Banking Systems of Some Other Countries. — England. — 
The Bank of England, started in 1694, was the only joint stock 
bank in England until 1826, and the only joint stock bank in 
London until 1835. By the Act of 1844, it was divided into an 
Issue Department and a Banking Department, and given the sole 
right to issue circulating notes. 

The Issue Department of the Bank was allowed to issue notes 
against its securities , In 1 89 7 the issue amounted to £ 1 6 , 800,000 
against securities, and £36,411,000 against coin and buUion 
on hand. The notes of the Bank are practically gold certifi- 
cates, being now secured by actual gold in the vaults of the 
Bank. This gives absolute security to the notes. This fact 
prevents hoarding, an evil than which there is none greater, 
as may be seen in times of unreasonable panic. 

By law the Bank is allowed to issue only a certain amount 
of notes against its reserve, but in case of need the Bank Act 
is suspended and the Bank of Issue can then put out notes be- 
yond the amount of securities. In the panic of 1847, there was 
danger that through repeated demands on the Bank, the cash 
reserve would be exhausted. Thereupon the government ad- 
vised the Bank to disregard the Bank Act and to issue notes to 
meet the emergency. In 1866, on May 11 (Black Friday), the 
same course was followed and in a short while from a state of in- 
describable frenzy affairs returned to the normal. 

The Banking Department of the Bank of England acts as the 
banker of the government in the management and payment of 
interest on the national debt, the issue and withdrawal of Ex- 
chequer bills and bonds, the issue of government loans, and 
other banking operations. 

It is the bank of deposit and the clearing house of the world. 
It is the clearing house of the other banks and holds the re- 
serves of all the other banks in Great Britain. 

It is not obliged to hold any cash reserve against its deposits. 

The Bank of England gives no interest to other banks for the 



228 BANKING SYSTEMS OF SOME OTHER COUNTRIES 

money it receives from them, and hence it is not surfeited with 
money in easy times. 

To protect itself against a too great withdrawal of its funds, 
the Bank of England raises its rate of discount. The effect 
of this is to stop borrowing and to draw money to itself. 

The Bank of England is out of politics. 

The chief defects of the English system are that much money 
is kept idle in the vaults of the Bank of England, and that 
currency is inelastic. 

France. — The Bank of France was founded by Napoleon I 
in 1800. Since 1806 it has had the monopoly in Paris of issu- 
ing notes, and in 1848 the monopoly was extended to all France. 
It is a private concern, but the government stands behind it 
and supervises it. 

The governor and deputy governor are appointed by the state. 
The Bank carries out the treasury operations of the govern- 
ment. 

All the banks in France are branches of the Bank of France. 

The Bank may issue notes to the extent of five billion francs, 
guaranteed by its assets. 

Germany. — The Imperial Bank of Germany was organized in 
1875. It has practically the monopoly of note issue. By the 
Act of 1875 it w^as allowed to issue uncovered notes to the 
amount of 250 million marks. The issue was later extended 
to 470 million marks. 

The issue is based on the assets of the bank. In case of 
business crises it may issue notes beyond the amount stated, 
but then one third must be secured by cash or its equivalent. 
A 5 per cent tax is paid for the extra issue. Hence there is 
elasticity of currency. Stringencies were thus relieved in 
1 88 1, 1882 (twice), 1889 (three times), 1890 (twice), 1893 (twice). 
The government controls the bank. (See Hepburn, Contest 
for Sound Money, p. 428.) 

Canada. — The banking system of Canada was the result of 
experiment and consultation. The legislation affecting banking 
was codified in 1870. Each bank must have a subscribed capital 



BANKING SYSTEM OF CANADA 



229 



of $500,000. Two hundred and fifty thousand dollars must be 
paid up and deposited in the hands of the Minister of the Treas- 
ury, who returns all but 5 per cent. The latter sum forms a 
guarantee fund for the safety of the circulating notes, and is 
called the " circulation redemption fund." 

The present banking act became operative in 1891. There is 
a government examiner for each large bank, and a monthly 
statement must be made by each bank. 

A bank may issue notes to the amount of its capital stock, 
and no reserve is kept on hand. The notes cannot be of less 
denomination than $5, and are mere credit instruments based 
on the assets of the bank. As a matter of fact, the issue has 
never been more than 50 per cent of the bank's capital. 

By amendment to the Banking Law^ (July 20, 1908) a bank is 
allowed to issue an emergency circulation during crop-moving 
time (Oct. i to Jan. 31). The emergency notes may equal the 
amount of the paid-up capital plus 15 per cent of its combined 
paid-up capital and surplus fund. Emergency notes above the 
amount of the paid-up capital are taxed at a rate not to exceed 
5 per cent per annum. (J. F. Johnson, in Annals of the American 
Academy of Political and Social Science, Nov., 19 10, p. 64.) 

The notes are a first lien on the assets of the bank, and a 
double liability on the shareholders. 

The notes of an insolvent bank bear interest at the rate of 
5 per cent from the date of the suspension of the bank. The 
government must pay them if they are not paid in sixty days by 
the bank. They are perfectly secure. The notes lack legal 
tender quality. Each bank watches over the actions of all other 
banks, and refuses their notes if the slightest weakness is mani- 
fested. Each bank must give statements of its condition to the 
other banks. 

The greatest elasticity obtains. Notes are sent back to 
each bank for redemption. The circulation varies 15 per cent 
in the course of a year. There is no inflation. The notes of 
each bank must be redeemed at clearing houses in definite re- 
demption cities, which are the same for all the banks. These 



230 BANKING SYSTEMS OF SOME OTHER COUNTRIES 

redemption cities are Montreal, Toronto, Halifax, Winnipeg, 
Victoria, St. John, Charlottetown. 

Each bank may have its branches, and no restriction is made 
as to the number or location of the branches. The branches 
numbered 2200 in 19 10. The advantage of the branches is great. 
When a stringency occurs in one section, the branch bank may 
have the assistance of the main bank and all its branches. 

The banks demand from time to time a confidential state- 
ment from each of their customers as to the condition of his af- 
fairs, his assets and his liabilities. Such a customer cannot 
impose on other branch banks of the first bank, since his finan- 
cial standing is known. 

The officers of a bank are not allowed to participate in any 
way in the borrowing of money from their banks. 

Scotland. — The Scotch banking system is often referred to 
as the ideal system of banking. Free banking with freedom of 
note issue existed in Scotland up to 1845, when the note issue 
was restricted. From that date no new bank of issue could come 
into existence, and the existing banks could keep up their cir- 
culation as it then stood and issue additional notes upon de- 
posit of coin. The authorized circulation was and is to-day 
£2,676,350. This amount is uncovered by any reserve. The 
circulation covered by coin deposits probably averages about 
£5,000,000 more. 

Since the limiting law of 1845 was passed, the elasticity of 
the currency has not been equal to what it was before, but it 
suffices for the country. The expansion needed can be accom- 
plished by the issue of notes on coin deposits, which deposits 
may be obtained from the Bank of England. The contraction 
is brought about by each bank returning through the clearing 
house the notes of all other banks and receiving its own notes 
in exchange, when each bank may cancel its own notes and thus 
reduce the amount of circulation. 

The notes of Scotch banks may be of lower denominations than 
£5. The Bank of England has no notes less than that amount. 

There are ten principal banks of issue in Scotland, but they 



QUESTIONS 231 

have over 1000 branches, distributed throughout the small towns, 
thus conveying banking facilities to all the people. The effect 
of this has been of great economic value, encouraging as it does 
thrift and the spirit of saving among even the poorest classes. 

Scotland has one bank or branch bank for every 4000 of pop- 
ulation, England has one for every 10,000, while the United 
States has one national bank for every 13,000 (1920). 

The deposits in Scotch banks amount to between $400,000,000 
and $500,000,000, with a population of about 4,000,000. 

An important advantage of branch banking consists in the 
facilities the system offers to customers of any main bank of 
conducting business with cities where it has branches. 

One feature peculiar to Scotch banking is the granting by 
the banks of cash credits. Two responsible men may go surety 
for any poor but honest man, who lacks only money to secure 
a comfortable home or to carry on his business. Through his 
sureties he obtains a cash credit on a bank, drawing out por- 
tions of the sum as needed and paying in what sums he may 
realize in his business. Many a successful business man has 
started with a cash credit. 

The banks pay interest on deposits. The desire to gain such 
interest and the existence of bank branches in every smallest 
district of the country result in bringing into active produc- 
tive industry every portion of available capital. 

QUESTIONS 

1. When were postal savings banks first instituted? When was the sys- 
tem adopted in the United States? 

2. Explain the postal savings bank system as it exists in the United 
States. 

3. What are the advantages of the postal savings bank system? 

4. Explain the federal farm loan banks, and the joint stock land banks. 
How do they benefit the farmers? 

5. What are the main features of the banking systems of England? Of 
France? Of Germany? Of Canada? Of Scotland? 

6. What special advantages are possessed by foreign banking systems? 

7. In what measure does the federal reserve system of the United States 
possess these advantages? 



CHAPTER XIII 

INTERNATIONAL TRADE. BALANCE OF TRADE AND 
BALANCE OF ACCOUNTS. CUSTOMS DUTIES 

I. International Trade 

Causes. — International trade is trade between nations. It 
is due to the need a country has for the products of other coun- 
tries, and to the need a country feels for markets more numer- 
ous than can be found at home for its own products. 

Every country requires the help of other countries for its 
supplies of necessaries, comforts, and luxuries, and the pro- 
ductive activity of every country results in an output greater 
than is necessary for home consumption. Hence the inter- 
change of products between different countries. 

A country will require some commodities that it cannot 
produce. Moreover, it will find it advantageous to buy from 
foreign countries some commodities that it could produce itself if 
necessary. Thus, while the United States produces a certain 
amount of sugar, and could possibly produce all that it needs, 
it is to our advantage to import the great bulk of our sugar. 
Other countries having greater facilities for the production of 
sugar can produce it at less cost, even calculating in that cost 
the rate of transportation ; and the capital and labor which 
would be employed in the production of that commodity in the 
United States will be better employed in the production of 
some other commodity. 

International trade is influenced by the difference between 
domestic and foreign prices. When prices are higher abroad, 
merchants will send their goods abroad ; when they are higher 
at home, merchants will find markets at home. 

232 



EFFECTS 



233 



Trade between countries is Export trade, when goods are sent 
out of the country ; Import trade, when goods are brought into 
the country. 

Effects. — International trade brings nations into close 
intimacy and arouses a spirit of competition which becomes 
an incentive to world production. All nations are rivals, but 
whereas in past centuries the rivalry was exerted with a view 
to gaining territorial and political supremacy, and was carried 
on by wars and bloodshed, to-day the rivalry is confined to 
gaining commercial supremacy, and is carried on by more peace- 
ful means — better products, more attractive display of goods, 
the genius of invention, advertising, timeliness of the appearance 
of commodities upon the markets. 

Foreign commerce may become in the hands of a nation a 
powerful weapon with which to inflict serious injury upon an- 
other nation. Favoritism, discrimination, and injustice may 
be practiced by one country towards another in commercial 
transactions, and may arouse intensely bitter feelings, that can 
open the way to serious international difficulties. 

International commerce may, at the same time, be an effective 
means of checking the encroachments of too aggressive nations, 
and of bringing about the adoption of just and fair treatment. 
This will prove to be the case especially between nations having 
protective tariffs, through which advantages may be granted 
or discriminations made in their mutual commercial relations. 

Exchange among individuals is the result or complement of 
division of labor. This holds true for international trade in 
great measure. Here the division of labor is of course that 
world division of labor described before, whereby nations may 
apply themselves more or less exclusively to the production 
of those commodities for which they possess special natural 
advantages. 

Advantages. — The advantages of international trade are 
many. In addition to those already suggested, some of the more 
special advantages may be enumerated as follows : — 

Advantages of Importation : (i) Additional well-being of the 



234 



INTERNATIONAL TRADE 



country, in receiving commodities which it could not produce 
itself. Thus, Holland receives building stone; Switzerland, 
coal; Norway, tropical fruits; England, lumber and wine; 
France, copper; the United States, rubber. (2) Economy of 
labor in buying things which can be produced more cheaply 
abroad than at home. This may happen when one nation is 
inferior to another in raw material, or has a higher scale of wages. 
Even when the country is rich in raw material, the facilities for 
production in a foreign country may be greater, as, for example, 
when coal is nearer to the operating plants and more abundant 
in the foreign country. (3) Help from other nations when 
the home products fail through accident. 

Advantages of Exportation : (i) It utilizes national resources 
and productive forces. (2) It develops a nation's industries — 
finds markets. (3) It furnishes markets abroad where much of 
the material produced at home may be disposed of after demand 
has ceased for it in the home markets. 

Extent of International Trade. — The commerce of the United 
States with foreign countries is enormous. The following table 
shows the imports and exports in recent years, in millions of 
dollars: — 



Year 


Imports 


Exports 


Imports 

AND 

Exports 


Excess of 
Exports 


1913 

1914 

1915 

1916 

1917 

1918 

1919 

1920 


1,813 
1,893 
1,674 
2,197 
2,659 
2,945 
3,904 
5,278 


2,465 
2,364 
2,768 

4,333 
6,290 

5,919 
7,920 
8,228 


4,278 
4,258 
4,442 
6,531 
8,949 
8,865 
11,824 
13,506 


652 

470 

1,094 

2,135 
3,630 
2,974 
4,016 
2,949 



(Stat. Abstr., 1920, p. 397.) 



The domestic agricultural exports of the United States ex- 
pressed in percentage of all domestic exports were as follows: — 



DOMESTIC COMMERCE 235 

1913 46.3% 1917 31-6% 

1914 47-8 1918 38.5 

1915 54-3 1919 530 

1916 35.5 1920 42.9 

(Stat. Abstr., 1920, p. 776.) 

United States exports of manufactures have been in relation 
to all domestic exports: — 

1890 21% 

1900 • • • • 35 

1910 , 44 

1920 51 

(Stat. Abstr., 1920, p. 785.) 

Following is a table showing the commerce of some foreign 
countries for comparison, in millions of dollars : — 











Imports 


Excess 


Excess 




Year 


Imports 


Exports 


AND 

Exports 


of 
Imports 


OF Ex- 
ports 


Canada 


1920 


1,064 


1,239 


2,303 




175 


France . . . 






1919 


5,747 


1,681 


7,428 


4,066 




Germany . 






1913 


2,563 


2,403 


4,969 


160 




Italy. . . . 






1919 


3,^&7 


1,001 


4,188 


2,186 




Mexico . , . 






1918 


88 


198 


286 




no 


Japan . . . 






1919 


1,074 


1,028 


2,102 


46 




United Kingdom 






1920 


9,425 


6,499 


15,924 


2,926 





(Stat. Abstr., 1920, p. 838. 



Domestic Commerce. — As shown in the preceding tables, 
the foreign commerce of the United States in 1920 amounted 
to $13,506,000,000, and is surpassed only by that of the United 
Kingdom. 

With regard to foreign commerce, it must be said that the 
United States, with its wealth of natural resources, of raw 
material and foodstuffs, its great systems of railroads, and the 
business genius of its citizens, stands in a position peculiar and 
distinct from that of other nations. Our country could do 



236 INTERNATIONAL TRADE 

very well without any foreign supplies, and if it devoted all its 
energies to the establishment of domestic markets throughout 
the immense extent of its own domains, it might find large 
enough and profitable enough sale for its products. 

The densely populated countries, England and Germany, 
and the comparatively small nations of Portugal, Denmark, 
Switzerland, Belgium, and Greece, limited as they are in natural 
resources, need foreign trade to supply them with the necessaries 
of life, and could only with difficulty get on without such trade. 
Again, their territories are so circumscribed that they would 
not find markets enough for their surplus products. Russia, 
although greater in extent of territory than the United States, 
has not the same class of inhabitants as the United States, and 
is more or less dependent on outside help. 

The domestic trade of the United States could be immensely 
increased. Even as it is, the domestic trade of this country 
is so extensive that foreign trade appears small in comparison. 
It is the opinion of many that too much emphasis is put upon 
our foreign trade, and too much mental labor and discussion 
are accorded it, when our domestic trade deser\^es more attention 
because of its immense expansion. Yet to others it is an indica- 
tion of the extent of production in the United States, that the 
country, large as it is, cannot supply markets enough for its 
produce, but must seek more markets abroad. 

To arrive at any definite knowledge of the extent of this do- 
mestic trade is not easy, since it is so difficult to know the facts. 
Whereas foreign trade transactions are recorded in the custom 
houses, domestic trade transactions are carried on in great 
measure without public record. Estimates, however, have been 
made, and the following table will give a fair idea of the extent 
of the domestic trade of the United States : — 

1850 $2,000,000,000 1880 $ 7,750,000,000 

i860 3,500,000,000 1890 12,000,000,000 

1870 6,250,000,000 igo2 20,000,000,000 

Consular Service. — To look after its commercial interests in 
foreign countries, each nation has its Consular Service. The 



FOREIGN PAYMENTS 



237 



consuls of. one country are stationed in all the important cities 
of every other country, and it is their duty to watch over the 
interests of the home country and to send home reports of 
trade conditions abroad. 

The United States has about iioo consular representatives of 
different grades in the various trade centers of the world. They 
are appointed by the President. 

The consular service of the United States has been of help 
to home manufactures through the reports sent in to and 
published by the government. Manufacturers are informed 
about the foreign markets and the best methods of shipping 
their goods to those markets. Various means are suggested 
for increasing the foreign trade and of coping successfully with 
the competition of manufacturers of other countries. 

Before 1906, the consular service of the United States was at 
a low ebb of efficiency, due to the facts that the consuls were 
poorly paid, that favoritism and the " spoils system " had much 
to do with the appointments, that very little supervision was 
exercised over the consular officers by the government. 

In 1906, a law was passed which classified the consulships 
according to their importance, substituted salaries for fees, 
confined consuls of a certain grade to the duties of their office, 
and instituted a system of supervision and inspection of the 
work performed. At the same time, the President (Roosevelt) 
issued an executive order subjecting all candidates for the 
consular service to a rigid examination, and providing that 
appointments should be made to the lower grades, and that the 
persons so appointed should be promoted to vacancies occurring 
in the higher grades, such promotion to be dependent on the 
efficiency shown. 

These measures promise well for the improvement of the 
service, and have already had a beneficial effect by attracting 
a better class of applicants for consular positions. There can be 
no doubt that our foreign trade will be helped by the greater 
efficiency of the consular service. 

Foreign Payments. — The means of receiving payment for 



238 



INTERNATIONAL TRADE 



goods shipped abroad is by bills of exchange. Money is sent 
to pay the balance. That the system of exchange is necessary 
may be gathered from the fact that no country has sufficient 
money to pay for its imports and at the same time retain money 
enough at home to carry on its own domestic trade. 

In the following table, showing the value of the imports and 
the stock of gold actually possessed by the countries, it will be 
seen that England, France, and Germany would not have suffi- 
cient money to pay for their imports, if actual money had to 
be paid out for them. Hence the evident advantage of 
exchange. 



Year 


Country 


Imports 


Stock of Gold 


1912 

1911 

1911 

1910 


United States 
United Kingdom 
France 
Germany 


$1,653,000,000 
3,309,000,000 
1,556,000,000 
2,126,000,000 


$1,799,600,000 

710,800,000 

1,200,000,000 

185,000,000 



(Stat. Abstr., 191 2.) 



II. Balance of Trade and Balance of Accounts 

Balance of Trade. — When the exports of a country exceed 
its imports, the balance of trade is said to be favorable to that 
country. It was the custom of the believers in the old mer- 
cantile system, and it is the custom of not a few to-day, to esti- 
mate the prosperity of a country by the balance of trade. They 
would have it that if the exports exceed the imports, the coun- 
try is prosperous ; if the reverse holds, the country is in danger, 
since it must export gold to pay its trade balances. 

Since 1877, the balance of trade has been in favor of the 
United States, with the exception of three years, 1888, 1889, and 
1893. If we look at some other countries, we find the balance of 
trade to be against them. Thus, in 191 1, we find the following 
facts for England, France, and Germany : — 



ITEMS ENTERING INTO BALANCE OF ACCOUNTS 239 



United Kingdom 
France . . . 
Germany . . 



Imports 



)3, 309, 000,000 
1,556,000,000 
2,309,000,000 



Exports 



)2,209 000,000 
1,172,000,000 
1,928,000,000 



Excess of Imports 



$1,100,000,000 
384,000,000 
381,000,000 



From the above table one would expect that these countries 
were far from prosperous, and that they would have to send out 
much gold to pay for the balances of their foreign trade. But, 
in summing up the standing of a country, there are other items 
which must be taken into account. We must judge of the 
financial state of a country by the Balance of Accounts and not 
merely by the Balance of Trade. 

Items entering into the Balance of Accounts. — In the balance 
of accounts there are five principal items, besides exports and 
imports, which raise the credit side of a country's accounts: — 

(i) Investment of Capital in Foreign Countries. — Foreign 
investments are made in United States bonds, state, county, and 
municipal bonds, railroad stocks and bonds, industrial, bank, and 
mining securities, real estate, life insurance. It was estimated 
that before the war of 19 14 six billions of foreign capital were 
invested in the United States. The interest on this vast sum was 
paid to foreigners. 

(2) Cost of Transportation paid to foreign shipowners — freight 
and insurance. Prior to the war of 19 14, England's claims against 
other nations on account of transportation amounted to over 
$400,000,000 annually, and the United States was paying over 
$200,000,000 a year for transportation and insurance. In 191 2, 
American vessels were carrying only 11% of our imports and 
domestic exports in our foreign trade. 

(3) The Sums spent by Travelers in Foreign Countries. — 
American tourists' expenditures in foreign lands for many years 
prior to 1914 averaged $18,000,000 annually. 

(4) Bankers' Commissions. — During the prewar period Lon- 
don was the bank of the world. The commercial paper and the 



240 INTERNATIONAL TRADE 

bills of exchange of all nations were handled by the banks of 
London, and the yearly commissions of London bankers for this 
feature of banking amounted to immense sums. 

(5) Immigrants' Remittances. — From 1896 to 1914, the sums 
thus sent abroad by immigrants amounted to over $158,000,000 
annually. 

From these various items, which constitute the invisible in- 
debtedness of a country, it follows that a country, the exports 
of which far exceed its imports, may still be a debtor country. 
Upon the balancing of the invisible items, it may be found that 
the excess of exports does not pay for the demands of the several 
items mentioned above. As a matter of fact, the United States 
has in the past thirty years been obliged to export gold to balance 
accounts, although the exports exceeded the imports. 

Since the beginning of the war of 1914, conditions have changed. 
Our exports have increased immensely over all preceding years, 
and at the same time the invisible items that kept the United 
States a debtor country have been considerably reduced or 
totally eliminated. 

The investments of foreign countries have passed into the 
hands of Americans to the extent of billions of dollars. 

The cost of transportation has been curtailed through the in- 
crease during the war of the merchant marine of the United 
States and of the transportation of foreign trade goods in Amer- 
ican vessels. The tonnage of the United States increased from 
7,714,183 tons, in 1912, to 16,324,024 tons, in 1920. The shipping 
engaged in foreign trade, in the latter year, amounted to 9,924,694 
tons. Whereas in 191 2 only 11% of our foreign commerce, ex- 
ports and imports, was carried by American vessels, in 1920, 43% 
of our foreign trade was conveyed in American ships. The mer- 
chant marine of the United States to-day ranks second among 
all the nations of the world. 

Tourists' trips and the remittances of immigrants abroad 
ceased during the four years of the war, and that drain on Amer- 
ican money was stopped for a considerable period. 

The unsettled condition of foreign exchange and of foreign 



CORRELATION BETWEEN IMPORTS AND EXPORTS 241 

currencies, which ceased to be based on the gold standard, have 
hampered the efficiency of London banks, so that they no longer 
draw the immense commissions as in former times. 

All these changed conditions together with the immense debts 
contracted by foreign countries in the United States have con- 
duced to make the United States, for the time being at least, a 
creditor nation. 

Correlation between Imports and Exports. — Another fact 
that must be taken into account in this connection is that 
exports and imports influence each other. It is given as a law 
that exportation provokes and determines importation, and the 
converse is also true, that importation provokes and determines 
exportation. 

If we take, for example, two countries, A and B, and suppose 
that the exports of A to B exceed the imports and other items 
of the balance of accounts, the final excess must be paid by B 
to A in gold. The sending out of gold from B will reduce the 
amount of money in B, and, as a consequence, there will be a 
stringency in money and a fall of prices in B. 

The fall of prices in B will prevent A from sending its exports 
to B to the same extent as before ; A will limit its exports to B, 
and will seek other countries, C, D, and E, where the prices 
will not be so low. 

On the other hand, the inflow of money to A will cause a 
greater amount. of money in A, and prices in A will rise. B will 
increase its exports to A, because of the good market it finds 
there. Thus, the exports of A and B will seek an equilibrium. 
This example illustrates an important principle in international 
trade. 

The example may be summarized as follows : — 

A B 

1. Exports greater than Imports. Imports greater than Exports. 

2. Gold moves from B to A. 

3. Amount of money less. 

Prices lower. 



Poor market. 



POL. ECON. — 16 



242 INTERNATIONAL TRADE 

4. Exports to B diminish. Imports from A diminish. 
In the meantime, because of the flow of money into A, 

5. Amount of money greater. 

Prices higher. Good market. 

6. Imports from B increase. Exports to A increase. 

7. Exports and Imports equal. Imports and Exports equal. 

III. Customs Duties 

Definitions. — International trade may be affected by cus- 
toms duties. 

These include Export duties and Import duties. 

Export Duties are duties imposed on products of the home 
country, whether in the raw state or as finished goods, which are 
shipped abroad to foreign countries. Duties on exports are very 
rarely imposed. 

Import Duties are duties imposed on products of other coun- 
tries entering the home country. Import duties are frequently 
resorted to. 

Import duties are of two kinds, Specific and Ad valorem. A 
specific duty is so much on the bulk of the product, e.g., 25 cents 
per pound, 30 cents per gallon. An ad valorem duty is a tax 
of a certain per cent of the value of the imported product. (For 
a discussion of the relative merits of specific and ad valorem 
duties, see " Customs Tariffs," Senate Document No. 547, pp. 
52, 92, et al.) 

Tariff. — The list of import duties on various products is 
called a Tariff. The tariff of the United States is divided into 
schedules, as follows : — 

A. Chemicals, Oils, and Paints. 

B. Earths, Earthenware, and Glassware. 

C. Metals and Manufactures of Metals. 

D. Wood and Manufactures of Wood. 

E. Sugar, Molasses, and Manufactures of Sugar and Molasses. 

F. Tobacco and Manufactures of Tobacco. 

G. Agricultural Products and Provisions. 
H. Spirits, Wines, and other Beverages. 
/. Cotton Manufactures. 



PROTECTIONIST POLICY OF THE UNITED STATES 243 

/. Flax, Hemp, and Jute, and Manufactures of. 

K. Wool and Manufactures of Wool. 

L. Silk and Silk Goods. 

M. Papers and Books. 

N, Sundries. 

A tariff law often includes also a Free List, containing the 
names of all goods on which no duty is charged. 

The tariff may be a Revenue tariff or a Protective tariff. 

A revenue tariff fixes import duties with the object merely of 
securing sufficient revenue for the sustaining of the machinery 
of the government. In this case, the taxes are high enough to 
secure a revenue, but are not prohibitive of importation, and 
those imported goods are usually taxed which do not come into 
competition with home industries. Thus, England taxes tea 
and gains thereby a revenue of about $17,000,000 per year. 

A protective tariff has for its object the protection of certain 
home industries, which for various reasons could not otherwise 
compete with the same industries carried on by foreign nations. 
The free importation of certain foreign articles may threaten 
the existence of home industries. Duties imposed on the foreign 
articles restrict their importation, and the home industries are 
encouraged to develop. The cost of the goods to the consumer is 
increased, but it is claimed that the extra cost paid by importers 
and consumers is counterbalanced by the public good attained 
in the development of home industries. 

Protectionist Policy of the United States. — The United States 
has been for many years committed to the principle and prac- 
tice of protection. The adoption of protection in the United 
States was brought about by force of circumstances, as will be 
seen in the historical sketch that follows (pp. 248-252). It was 
not the result of any scientific investigation into the relative 
merits of free trade and protection. As Ely {Outlines of Eco- 
nomics, 1908, p. 311) says : " The American tariff is a historical 
growth, and bad as it may be in many respects, it has taken deep 
root. During the last century it has become part of our life, 
and cannot be suddenly eradicated with impunity." 



244 INTERNATIONAL TRADE 

That protection, at least in a modified form, will continue 
to be the policy of the country for many years to come, seems 
to be the opinion as well as the hope of the more conservative 
authorities. The protective policy of the past has created a 
condition in the industrial and commercial life of the country 
that could not endure if there should be a sudden change of 
policy. Immediate adoption of free trade would be tantamount 
to opening the floodgates of ruin and anarchy. Numerous in- 
dustries that ow^e their origin to protection, or that can exist 
only through the help received from the artificial prices created 
by the tariff, would be destroyed. An immense amount of 
capital invested in such industries would be lost, the laboring 
class would suffer by the closing down of the mills, and social 
revolution would be imminent. 

At present the popular opinion appears to favor at least a 
modified protection. The political party that formerly stood 
for free trade has considerably modified its views within recent 
times. The South that held so long to the free trade principle 
now demands a measure of protection. The agitation in Eng- 
land, since 1846 a free trade country, looking to the adoption 
of protection, will undoubtedly have weighty influence in con- 
firming protectionists in their views and in modifying the force 
of free trade arguments. 

Protection without doubt has its advantages. But the 
method of protection as pursued by the country at present has 
come to be considered the main cause of the evils which society 
endures. The high cost of living, the huge corporations and 
trusts which have arisen under protection, the concentration 
of money and the power attendant on great wealth, the large 
dividends which industries can pay to stockholders, the vast 
profits that accrue to corporations, while the army of laborers 
who contribute to these profits by their labor and their skill 
receive but the modicum of wages — these are some of the 
evils of the day that are laid at the door of protection. More- 
over, while protection has added to the number of indus- 
tries in the country, it has at the same time introduced into 



PROTECTIONIST POLICY OF THE UNITED STATES 245 

the industrial world a host of industries and establishments 
which are able to survive and make a bare living wholly be- 
cause of the high protective tariff. These industries determine 
in most cases the price of labor, the wages of the workingman. 
Such wages must necessarily be low, because of the small profits 
the tariff-supported industries can make. If protection were 
withdrawn, these industries would have to go out of existence. 
Nor would it be an unmixed evil if industries that are unable 
to pay a living wage to their employees were driven out of the 
field of labor competition. 

The evils following upon the present methods of protection 
are apparent, but the remedy, in the opinion of prudent and 
conservative thinkers, does not lie in the immediate and sud- 
den withdrawal of protection. A system that appeals to them 
is a gradual reduction of tariff duties, extending over a period 
of years, allowing existing industries to accommodate themselves 
to the change, and enabling those great factors of production, 
capital and labor, to adapt themselves to new conditions. 

Such indeed was the popular demand expressed in the presi- 
dential election year of 1908, and still more insistently declared 
in the year 19 12. In answer to the popular clamor in 1908, 
some effort was made through the Payne tariff to remedy the 
acknowledged evils of the high protective duties. As subse- 
quent events demonstrated, the effort failed of its purpose. 

The duties were substantially lowered by the Underwood 
tariff, which became law Oct. 3, 1913. If it had been expected 
that the new tariff would at once inaugurate a reign of pros- 
perity in the land, the expectation was not fulfilled. Many 
important industries were seriously affected by the reduction 
of duties. A degree of unrest and uncertainty prevailed through- 
out the country. Defenders of the law, however, claimed to 
see a gradual adjustment of industries to the new conditions, 
when the European war (Aug. 19 14) upset the whole commer- 
cial life of the world. 

One of the salient facts that must strike even the superficial 
student of tariff-making in this country is the immense diffi- 



246 INTERNATIONAL TRADE 

culty to be found in adopting a tariff that will be satisfactory 
to all industries and to all sections of so vast a country as the 
United States. Many of the great industries of the country are 
so interwoven and so interdependent that the raising or lowering 
of duties on the product of one will produce an effect on a whole 
chain of connected industries. Because of this fact and others 
as important, any real reform in tariff matters must be the result 
of long and deliberate study and investigation. 

A step in the right direction has been taken by the creation, 
on Sept. 8, 1916, of a permanent Tariff Commission. It is 
composed of six members appointed by the President, not more 
than three of whom shall be adherents of the same political 
party. The duty of the Commission is in general "to investi- 
gate the operation of customs laws, including their relation to 
the federal revenues, their effect upon the industries and labor 
of the country, and to submit reports of its investigations " to 
Congress. (Act Sept. 8, 1916.) 

The Commission can do much to eliminate the evils of the 
present system, and to establish the tariff on a scientific basis. 

Methods to replace Protection. — Other methods have been 
suggested to take the place of tariff protection. They are : — 

(i) Bounties to Producers: — These would have the following 
advantages : They w^ould not provoke international conflicts. 
They would not hinder production, because they would not in- 
crease the price of raw material. They would allow no miscon- 
ception with regard to them. They would be an admission of 
our weakness in certain lines of production. 

(2) Freedom from Taxes for infant and weak industries, as in 
the case of educational establishments. 

(3) No Help at all to Infant Industries. — Left to themselves, 
it is claimed, they will in time establish themselves on a paying 
basis. 

Contractual System. — A system that has come into vogue 
recently is the Contractual System. Commercial treaties are 
made between nations. These treaties have the following 
advantages : — 



CONTRACTUAL SYSTEM 247 

1. They guarantee stability of tariffs for a definite period, usu- 
ally ten years. 

2. They admit differentiation of rates. There is a maxi- 
mum and a minimum rate. The " most favored nation " clause 
allows the minimum rates to the nation having that clause. 

3. They lead to a more liberal regime and to the abolition or 
lowering of barriers between nations. 

Tariffs are now constructed with a view of obtaining the best 
possible treatment from other countries, and are made to con- 
tain certain more favorable conditions and certain broad con- 
cessions, which may be applied to nations which show a cor- 
responding kindly disposition. A certain amount of latitude is 
granted the President, so that he may enforce the strict letter 
of the law against foreign countries or grant them concessions, 
as circumstances may determine. 

QUESTIONS 

1. What is international trade? What are some of its causes? Its 

effects ? Its advantages ? 

2. Why has the consular service been instituted? 

3. Why are bills of exchange necessary? 

4. How does the domestic trade of the United States compare with its 

foreign trade ? 

5. Is an unfavorable balance of trade an indication of the lack of pros- 

perity of a country ? 

6. What items enter into the balance of accounts of a nation ? 

7. Explain by example the correlation between the imports and the ex- 

ports of a country. 

8. What are export duties? Import duties? Specific duties? Ad 

valorem duties ? 

9. What is a tariff ? How is the list made up ? 

10. What is a revenue tariff ? A protective tariff ? What is the policy of 

the United States in regard to the tariff? 

11. What suggestions have been made to render tariff-making more effec- 

tive? What have been the defects alleged to exist in the recent 
tariff-making ? 

12. What difficulty attends all tariff-making in the United States ? What 

is the reason for the creation of a permanent Tariff Commission? 

13. What methods are suggested to replace protection? 

14. What is the contractual system? 



CHAPTER XIV 
PROTECTION AND FREE TRADE 

I. Historical Sketch 

Historical Sketch of Protection. — From the close of the 
Middle Ages, all countries were for protection. Agitation set 
in during the latter part of the eighteenth century. 

1774. France tried free trade. 

1776. Adam Smith's Wealth of Nations proclaimed free 
trade, and had immense influence in forming public opinion 
throughout the world. 

1789. An act was passed by the newly formed Congress of 
the United States government, for the levying of duties upon 
foreign goods imported into the country. Its purpose was 
mainly for the support of the government. 

1806. During a war between France and Great Britain, the 
British government issued an " Order in Council," declaring 
the coast of Europe from Brest to the Elbe in blockade. In the 
same year. Napoleon, by his " Berlin Decree," declared the 
British Isles under blockade. 

1807. Great Britain issued a new " Order in Council," for- 
bidding American and other neutrals to carry any products to 
France, except on the two conditions, that vessels carrying such 
products undergo search by British authorities for contraband 
goods, and that they enter a British port and pay duties on the 
cargoes. In the same year. Napoleon issued his " Milan Decree," 
commanding the seizure of any vessel which should conform to 
the ruling of the last " Order." 

1807. Subsequent to the issue of the 1807 " Order in Coun- 
cil," Congress, at the suggestion of President Jefferson (1801- 

2aS 



HISTORICAL SKETCH OF PROTECTION 249 

1809), passed the Embargo Act, which closed our ports to all 
trade with foreign nations. 

1 808- 1 809. This act was further strengthened by additional 
legislation. Our exports fell in a single year from $49,000,000 
to $9,000,000. 

1809. To prevent smuggling, the '' Force Act " was passed. 
It prohibited the loading of any vessel except by permit, and 
allowed the seizure of any produce or goods on their way to the 
seacoast, unless the owner gave bonds that they should not 
be sent out of the country. The act was enforced by the use 
of United States land and naval forces and state militia. 

The Embargo Act had a great economic effect on the country. 
Labor and capital were forced into home manufactures. Cotton 
mills, shoe, hat, and other factories were started, and many 
important industries were opened up. 

1809. Towards the end of the year, the Embargo Act was 
repealed and replaced by the Non-intercourse Act, which opened 
our ports to all nations except France and England. 

1812-1815. The war with England caused a withdrawal of 
foreign competition. As a result, our home industries, espe- 
cially our textile manufactures, grew rapidly. 

181 5. The war ended, and imports began again. The 
newly started industries met the competition of foreign pro- 
ducers, and, to save them, protection was found necessary. 

18 16. By the tariff of 181 6, the customs duties on imports 
were raised, especially those on cottons and woolens. The 
tariff then became protective, and has with slight exceptions 
remained so down to this day. 

1824. Henry Clay advocated protection for protection's 
sake, and caused to be passed in Congress a new tariff, which 
fixed the average scale of duties at thirty-three and one third 
per cent. 

1828. A new tariff bill was passed, increasing the previous 
average rate from thirty-three and one third per cent to 
forty-five per cent, This bill was violently opposed by the 
South. 



250 PROTECTION AND FREE TRADE 

1 831-183 2. Additional duties were laid on manufactured 
goods. 

1833. A compromise tariff became law. It provided for a 
gradual reduction of duties during the following ten years. The 
tariff was brought about by the agitation in the South. There 
the cotton producers felt the restriction put upon their produce, 
because of the lessening of demand of foreign cotton mills, which 
was the result of the high imposts. The duties gradually reached 
a twenty per cent level. (Cf. E. L. Bogart, The Economic 
History of the United States , p. 153.) The result was the sus- 
pension of many factories and a general depression in trade in 
1837-1842. 

1840. A protectionist president (Harrison) was elected. 

1845. The compromise tariff was repealed, and a new tariff 
act passed which raised the duties. 

1846. England adopted free trade. 

1846. The Walker tariff, intended chiefly for revenue and 
not protection, became law. The rate was about twenty-four 
per cent. 

1857. The duties were still further lowered. 

1 86 1. The Morrill tariff act restored duties to the status of 
1845 ^i^d increased the duties on iron and wool. 

The Southern Confederacy adopted free trade in its con- 
stitution. 

1861-1865. Civil War. 

1862-1864. '^ War tariffs " taxed every import. Almost 
every domestic product was taxed, and a corresponding com- 
pensatory duty imposed on imports. The average tariff rate 
was 40.29 per cent. 

1865. Taxes were reduced. 

1867. The Senate voted to repeal the tariff. The House 
opposed. 

1870-1872. Tariff rates were reduced and the free list greatly 
enlarged. 

1883. The tariff was revised, some taxes being lowered and 
some raised. 



HISTORICAL SKETCH OF PROTECTION 25 1 

1888. The Mills bill proposed placing wool on the free list. 
The bill failed of enactment into law. 

1890. The McKinley tariff was adopted. The duties aver- 
aged 48.2 per cent, and power was given the President to impose 
duties on free articles, when countries entering these free ar- 
ticles levied unreasonable duties on our goods. 

1894. The Wilson-Gorman tariff was adopted. It made the 
average rate 37 per cent. Wool, copper, and lumber were on 
the free list. 

1897. The Dingley tariff was enacted. Copper was made 
free, the steel duty lowered, wool and lumber were taxed. The 
duties were in general made higher. 

1908. More or less agitation had been going on during the 
past decade on the subject of the tariff. Special interests in 
special parts of the country had sought a reduction of the exist- 
ing tariff rates on certain commodities, and this agitation had 
become general throughout the country during the years im- 
mediately preceding, so that the government was led to institute 
an investigation into the matter. 

A Congressional Commission had before it, during the year 
1908, manufacturers in various lines, and sought out facts that 
might lead to a change of tariff rates. The tariff question be- 
came a political issue in the presidential election which took 
place in this year, and both parties gave pledges of a revision of 
the tariff as the first step of the new administration. The Re- 
publican party won the election, and W. H. Taft became Presi- 
dent-elect. 

1909. President Taft assumed office March 4, and faithful to 
the pledge he had given prior to his election summoned an extra 
session of Congress to meet March 15, for the purpose of re- 
vising the tariff. 

The extra session was held at the time appointed, and after 
over four months' discussion in Congress, the Payne tariff be- 
came a law, August 5. 

Although disputed by some, the Payne tariff was generally 
admitted to be on the whole a slight advance of rates above 



2 52 PROTECTION AND FREE TRADE 

those of the Dingley tariff. It reduced former rates on iron ore, 
lumber, and leather products, placed hides and works of art on 
the free list, advanced rates on cotton goods. Notwithstanding 
a few such changes, the new tariff practically left matters where 
they were before, bringing very little if any amelioration of the 
condition of the great mass of the people, the consumers. 

The new tariff contained provisions for a maximum and a 
minimum rate. The maximum rate was an increase of 25 per 
cent on all duties, and was to apply to all countries that dis- 
crirninated against the products of this country.^ 

191 2. During the preceding four years the high cost of 
living brought about a condition of popular unrest and dissat- 
isfaction. The high prices were generally attributed to the 
tariff. Hence, revision of the tariff became the main issue in 
the presidential election campaign of this year. The Demo- 
cratic party pledged itself to a reduction of the tariff, and a 
democratic President was electdd. Both Houses of Congress 
were Democratic. 

191 3. On April 7, an extra session of Congress was called 
by President Wilson to make changes in the tariff. The Under- 
wood bill was taken up in Congress, and after long deliberation 
became a law on Oct. 3, 1913. The new tariff reduced the 
average tariff rate from 36.86 per cent to 26.67 P^^ cent. It 
put on the free list all meats, raw wool, steel rails, and wood 
pulp. It reduced the tax on sugar. It lowered duties on ar- 
ticles of clothing, on machinery, and on live stock. To make 
up for the deficiency in the government revenue resulting from 
the reduction of the tariff, a federal income tax was imposed. 

191 6. On Sept. 8, a Tariff Commission composed of six mem- 
bers appointed by the President was created to study the tariff 
problems and report thereon to Congress. 

192 1. On May 27, the Fordney Emergency tariff was ap- 
proved. It increased duties, contained anti-dumping provisions, 
and restricted imports of dyes and chemicals. 

^ The same law provided for a corporation tax : A tax of i per cent was 
imposed on the net earnings of corporations over and above $5000. 



EFFECTS AND PRINCIPLES OF PROTECTION 253 

II. Effects and Principles of Protection 

Under this heading protection will be discussed in its various 
phases. It is believed that the discussion will suggest original 
thought and lead to a better understanding of the subject. 

I. Protection invites Capital to take up new Industries by 
making them profitable. 

When industries are open to competition, it is certain that, 
owing to a lower rate of wages, greater mechanical skill on the 
pa^t of laborers long engaged in the arts, a greater amount of 
natural facilities, cheaper transportation, and various other 
reasons, foreign producers of certain commodities may be able to 
undersell our home producers and keep them from the markets. 

But let a duty be put on the foreign product when it is im- 
ported into our country, and the effect will be that the cost of 
production of the imported article will be greater, the impost 
entering into the cost of production, and consequently the price 
of the foreign article will be raised. The home producers can 
now undersell the foreign producers and secure a market for the 
home product. To illustrate: — 

Cost of production of an article before protection — 

Foreign $ .90 

Home 1.20. Price ^$1.00. 

Evidently the home producer will not produce. 

Let a duty of $.50 on each imported article be imposed, then, 

Cost of production of the article after protection — 

Foreign $1.40 

Home 1.20. Price =$1.30^ 

Evidently the foreign producer will be driven from the market. In 
each case, the price is controlled and may be fixed by the producer whose 
cost of production is lowest. 

In a case similar to the one above, home capitalists will invest 
in the protected industry, because it has become profitable to do 
so. And that they have done so may be seen by a review of 
the history of commerce in the United States. The moment 
an industry otherwise unprofitable became a protected indus- 
try, large sums of capital were invested in it. 



2 54 PROTECTION AND FREE TRADE 

2. Does Protection increase the Labor and Capital in a Coun- 
try ? — This is a disputed question. The proposition that 
protection does not add to the total amount of labor and capital 
in a country rests on the supposition that in every country 
capital will be invested in those industries for which the country 
offers special facilities, and that those industries are so numer- 
ous and so profitable that they will employ all the capital and 
labor of the country. In that case, protection, if introduced, 
would divert labor and capital from old industries or from other 
industries which would not need protection. The total amount 
of capital invested and labor employed would still remain the 
same, but they would be engaged in other industries. 

The proposition, however, will not stand when the old and 
unprotected industries, in which capital would naturally be in- 
vested under free trade, do not offer profit enough to induce 
capital and labor to engage in them. This condition might be 
brought about by competition, which might reduce profits to 
the lowest possible limit, or by overcrowding of the labor mar- 
ket. In such a case, capital would not be invested in such in- 
dustries, but would be allowed to remain in safe but low-inter- 
est-paying securities, or it would go outside the country in 
search of more profitable investment. 

Nor will the statement be absolutely true if the protective 
duties cause foreign capital to be invested within the limits of 
the home country in the protected industries. In either of these 
cases, it must be admitted that protection does add to the total 
amount of capital and labor in the country. 

3. Protection establishes less Productive Industries in place 
of more productive industries, and causes thereby an economic 
loss to the country. 

This statement may be illustrated as follows: $100,000 is 
invested in an industry which is unprotected and which can be 
carried on profitably without protection. We will suppose the 
profit to amount to $2000 a month, made on 1000 articles pro- 
duced. The relation between capital and profit and product 
may be expressed thus : — 



EFFECTS AND PRINCIPLES OF PROTECTION 255 

Capital $100,000 

Profit $2,000 

Product (articles) 1,000 

Let this capital be taken out of this industry and be invested 
in a protected industry. A protected industry is presumably an 
industry which on account of various disadvantages will not be 
sufficiently profitable if left to itself, and needs the aid afforded 
by the protective duties. Suppose the protected industry in 
this case is one in which $100,000 capital would produce 800 
articles a month at a profit of $1200 without protection, and 
that a tariff of $2 per article is imposed for protection. The 
relation of the above $100,000 capital to profit and product 
might then be expressed by the figures: — 

Capital $100,000 

Profit $2,800 

Product (articles) . 800 

But of the profit in this case $1600 is due to the tariff and is 
paid by the consumers in the country in addition to what they 
would have to pay for articles imported free of duty. The figures 
800 articles at $1200 profit represent the real relative infe- 
riority of the protected industry, as compared with the figures 
1000 articles at $2000 profit in the unprotected industry em- 
ploying the same amount of capital. 

If 1000 articles are to be produced in the protected industry, 
more capital must be invested. Thus the reduced productivity 
of capital is apparent. The amount of the product, relative 
to the capital employed, will be less than if the same amount of 
capital were employed in a self-supporting industry. 

This condition constitutes an economic loss to the country, 
and the loss continues while the industries remain dependent on 
protective duties. 

It is claimed, however, that the economies developed in an 
established industry will ultimately make it self-supporting, and 
that there will come a time in most of the protected industries 



256 PROTECTION AND FREE TRADE 

when they will not need the help of protection, but may prosper 
unaided. 

Indeed, it is held by many that these industries, if left unpro- 
tected and abandoned to their own resources, would in time have 
risen of themselves and have forced their way to the top, in 
spite of the opposition presented by foreign competition. They 
would be undertaken by venturesome capitalists who would 
persevere in spite of small profits. Gradually, the cost of pro- 
duction would be lowered and the industry reach a self-sup- 
porting basis. When such a stage is reached, the industry ceases 
to be an economic loss to the country. 

4. Protection should be Temporary. — Protection hastens the 
establishment of a new industry, which in time becomes self- 
supporting, after which protection should cease and the price of 
the product should decrease. 

It may happen that in the beginning some industries will meet 
special disadvantages which would render them unprofitable 
because unable to compete with the same industries long estab- 
lished and carried to a high degree of efficiency by foreign pro- 
ducers. 

Here protection will undoubtedly benefit the infant industries, 
and J. S. Mill, although an upholder of free trade, makes an ex- 
ception in this case in favor of protection. He says: " The 
expense of production being always great at first, it may happen 
that the home production, though reall}^ the most advantageous, 
may not become so until after a certain duration of pecuniary 
loss, which it is not to be expected that private speculators 
should incur in order that their successors may be benefited by 
their ruin. I have, therefore, conceded that in a new country a 
temporary protecting duty may sometimes be economically 
defensible ; on condition, however, that it be strictly limited in 
point of time, and provisions be made that during the latter 
part of its existence it be on a gradually decreasing scale." (In 
Ely, Problems of To-day, p. 61.) 

After a time, through inventions in machinery, the increasing 
efficiency of the workmen, the advance of connected industries, 



EFFECTS AND PRINCIPLES OF PROTECTION 257 

and competition between domestic enterprises, the disadvantages 
under which the infant industry labored may be overcome, and 
then the industry will become profitable in itself. 

When this has come about, there is no further need of pro- 
tection. The industry is able to withstand the competition of 
foreign producers, and the tariff should be withdrawn so as to 
force a reduction of prices. Even without a change in the tariff, 
the producer should be content with a reasonable profit, such as 
would be realized if the price of the product were fixed about 
the same as the price received by the foreign producer before the 
tariff was imposed; and competition between different pro- 
ducers ought to force the price down to that point. 

Unfortunately for the consumer, this is not always done. 
Long after the industry has become independent of all tariff aid, 
and has reduced the cost of production so as to be able success- 
fully to compete with a foreign industry, the artificially made 
tariff prices are kept up. Combinations of capital are made by 
which the higher prices are maintained. The result is that the 
profits of the capitalists become enormous and the consumer is 
made to bear the burden. Protection in such cases becomes 
class legislation, favoring the few at the expense of the 
many. 

Another result from such a condition of things is that there 
are sometimes two prices for a product, a high home price, 
which is determined by the tariff, and a lower foreign price for 
the same product sold abroad. Thus, if the cost of production, 
in the beginning 70 cents, has been reduced to 40 cents through 
the gradual growth of the industry, it is clear that the producer 
may with profit sell his product in foreign markets for 60 cents 
or 70 cents, while the home tariff-fixed price remains at 80 
cents. 

Although protection should be withdrawn or at least gradually 
decreased when the industry has become self-supporting, there 
are obstacles in the way of making either change. Our own in- 
dustrial history shows that many protected industries, though 
they have long since passed out of the stage of infancy, have 

POL. ECON. — 17 



258 PROTECTION AND FREE TRADE 

constantly been clamoring for still greater protection, and prices 
have risen instead of gradually falling. 

This feature of the case may be thus explained. A protected 
manufacturing industry may be carried on by several classes of 
producers, A, B, C, D, E, F, etc. Class A enjoys extraordinary 
facilities and could profitably carry on the business without any 
aid from protective duties. Class B, having fewer natural ad- 
vantages, needs some slight help. Class C, still more disad- 
vantageously placed, needs yet greater help. And so on 
through the series of classes until we meet the lowest class, 
which is just able to make a slight profit with all the assistance 
afforded by protection. 

Protection is absolutely needed by this lowest class, and propor- 
tionately less by each class as we ascend the scale, and every in- 
crease of protection will be gladly accepted by the classes lowest 
down in the series. If protection were reduced, the lowest 
would have to retire from business. Hence the constant striv- 
ing after greater protection by the inefficient classes, which have 
engaged in the industry and can continue in the industry only 
because of the high prices established by protection. 

5. The Burden of Raised Prices under Protection falls on the 
Consumer. — If, under foreign competition, the price of an im- 
ported article is 60 cents, and a duty of 50 cents is imposed, the 
price of the article may rise from 60 cents to $1.10. The added 
cost of production imposed on the foreign producer will enable 
home producers to compete with foreign producers, and the 
price fixed by the home producers will be as close as possible to 
the foreign tariff-made price, with the double view of gaining 
the greatest amount of profit and of securing the largest mar- 
ket for their own product. In the case quoted, the price might 
be $1.00 or $1.05 or $1.10. 

Before the tariff was imposed, the consumer could obtain the 
article from the foreign producers for 60 cents ; after the tariff 
is imposed, he must pay $1.00 or $1.05 or $1.10 to the home 
producers (or to the foreign producers) for the same article. 

If 20,000,000 articles were consumed when supplied by foreign 



EFFECTS AND PRINCIPLES OF PROTECTION 259 

producers at the price 60 cents, it may be that, after the impos- 
ing of the tariff, the number of foreign products consumed will 
fall to 5,000,000, and home products will supply the deficiency 
of 15,000,000. 

For the 20,000,000 articles at the price 60 cents, the consumers 
paid $12,000,000. Under the tariff, they must pay for the 
5,000,000 foreign articles, at the rate of $1.10 each, say $5,500,000, 
part of which will go to the government as customs duties, and 
for the 15,000,000 homemade articles, at the rate of $1.05 each, 
say, $15,750,000, or a total under the tariff of $21,250,000, — 
an increase of $9,250,000 over the price paid under free trade. 



Free Trade 


Protection 




Foreign product =: 20,000,000 
Price = $.60 


. Foreign product = 
Home product = 
Foreign price = 
Home price = 


: 5,000,000 
: 15,000,000 
-- $1.10 
: $1.05 


StTM PAID BY Consumers 




For foreign product =$12,000,000 


For foreign product — 
For home product — 
Total 


: $5,500,000 
: $15,750,000 




$21,250,000 




Increase 


12,000,000 




$9,250,000 



The consumer may suffer in still an(M:her way. In order to be 
able to sell his product at a slightly lower price, the foreign 
producer may reduce the cost of production, or he may adulter- 
ate his goods. This latter means may frequently be resorted to, 
with the result that the consumer, though paying a higher price, 
will receive an article of inferior quality. 

In the former case, the reduction of cost of production may be 
brought about by the employment of cheap and inefficient labor, 
with a consequent deterioration of the article produced. 

It must be said that when, in the illustration given above, 
the price of the article is raised to $1.05 by the tariff, a great 
amount of capital may be invested in the industry, and pro- 
duction may receive so great an impetus that the supply of 
articles will greatly increase. The supply thus increasing, the 



26o PROTECTION AND FREE TRADE 

price of the article may be forced down by competition of differ- 
ent producers. In all probability, however, it will not fall to the 
level of the free trade price, 60 cents. 

Again, the impetus given to production may end in overpro- 
duction and a congestion of the markets, with a consequent in- 
jury to both labor and capital. Says one writer: " At the pres- 
ent time [1905] this very phenomenon is taking place in 
France with regard to wine growing. The high duty put on 
foreign wines, and the subsequent rise in prices, led to so great a 
production of wine that it exceeded the demand and resulted 
in the failure of many wine growers to dispose of their goods. 
The same result, although on a smaller scale, has taken place 
in French wheat production." (Gide, Principles of Political 
Economy, p. 341.) 

6. Protection should be Limited. — If protection were limited 
to a few industries, it could no doubt help them and cause them 
to grow stronger and ultimately to reach a stage where they 
would be self-supporting. 

But if protection is given to many industries, it will have the 
effect of raising the prices of all the products of these industries, 
and as the products of some industries will be material for other 
industries, the protection to the latter will be largely offset, 
and the period at which ^hey might have become independent 
and self-supporting will be indefinitely delayed. 

Let a-10, b-20, c-30, d-40, e-50, be materials produced by five 
unprotected industries, yl , B, C, D, E, and used by an unprotected 
industry N, with the figures representing the prices, in cents, 
at which the materials may be obtained under free trade, when 
all the markets are open and materials may be obtained at the 
cheapest rates. The price of the articles produced by industry 
N may be 60 cents. 

Now, if industry iV is in a struggling condition, it may well be 
benefited by an import duty, which will restrict foreign competi- 
tion in the article produced by N, and cause the price of that 
article to rise to $1.00. There will be a gain for industry N of 
40 cents on each article, and while the materials used by it re- 



EFFECTS AND PRINCIPLES OF PROTECTION 261 

main as they were at the price figures 10, 20, 30, 40, 50 cents, 
industry N will be put on a fair way to become more efficient, and 
may in a comparatively short time reach a stage of independence, 
when the duty of 40 cents may be removed with no detriment 
to the industry and with evident benefit to the consumer of the 
article produced by the industry. 

But if, while the help of a duty of 40 cents on each article is 
given to industry N, and the price of the article is raised from 
60 cents to $1.00, protection is granted also to the industries ^, 
B, C, D, E, the result may be that the prices of the materials 
produced by these industries will rise from the figures 10, 20, 30, 
40, and 50 cents, to, let us say, 20, 40, 60, 80, and 90 cents. 

It will be evident that industry N may now be no better off 
even with the price of its product raised by duty to $1.00, than 
it was before with the price at 60 cents and with the materials 
of industries A, B, C, D, E, rated at the prices 10, 20, 30, 40, 50 
cents. 

Unprotected Industries A, B, C, D, E. 

Materials produced by them, and used by N . . . . a, h, c, d, e. 

Prices of these materials, in cents 10, 20, 30, 40, 50. 

If price of iV's article is $.60 . Difficulty. 

If price of iV's article is $1 .00 Success. 

After protection has been extended to A, B, C, D, E. 

Materials as above a, b, c, d, e. 

Prices of m_aterials, raised by tariff, in cents .... 20, 40, 60, 80, 90. 

If price of N's article is $1 .00 Difficulty. 

If price of iV's article is $1.40 Success. 

If adequate protection is to be extended to industry N, a new 
duty must be imposed on the foreign competing product, so that 
the price of the product of industry N may be raised still further. 

7. Protection reduces Foreign Trade. — Protection has the 
effect of reducing the imports and the exports of a country, and it 
cannot bring about a permanent increase of money in a country. 

When, for instance, the price of an article is such that foreign 
producers can sell in our markets with profit, foreign producers 
of that article will send to us a great amount of their product. 



262 PROTECTION AND FREE TRADE 

Let a tariff duty of 40 per cent or 50 per cent be imposed, and 
the foreign producers will be forced to restrict the amount sent to 
us, and will seek other markets, where the price is more invit- 
ing than ours. Should this extend to a great many articles, it 
will be clear that there will be a great decrease in our imports. 

Our exports will surpass our imports. The excess of our ex- 
ports will be paid for in money, and gradually the amount of 
money in the country will increase. A rise in prices will follow. 

This rise in prices will make our markets less advantageous for 
foreigners to buy in. The demand for our goods will decrease. 
Our exports will decrease. Indeed, it is an axiom that a country 
cannot export unless it will import. 

Owing to the excess of our exports over our imports, which 
protection will cause to exist for a time, there will be a flow of 
money into our country. This will not be permanent, for the 
reason mentioned above, viz., the temporary inflow of money 
will cause prices to rise and will bring about a reduction of our 
exports. 

8. Protection causes International Animosities. — The adop- 
tion of a high protective tariff by one nation antagonizes the 
commercial interests of other nations, and will lead to retalia- 
tory high tariffs against the exports of the protectionist nation. 
The export trade of such a nation may be materially affected 
and even wholly destroyed by such counter tariffs. New mar- 
kets must be sought with much risk and loss to exporters. 
And so animosities are aroused between nations which may 
easily pave the way for actual war. 

An illustration of this may be found in an agitation that 
once arose in the relations between Germany and the United 
States. Our tariff rates on foodstuffs aroused the animosity 
of the German agrarian party, and they sought help from the 
government in the shape of a high import duty on all American 
goods. The German government in February, 1905, entered 
into commercial treaties with Russia, Austria, Switzerland, 
Roumania, Italy, Belgium, and Servia. A new tariff was made 
for the United States, which increased the rates on all American 



EFFECTS AND PRINCIPLES OF PROTECTION 263 

products brought into Germany two or three times higher in 
some cases than the rates for the other treaty nations. The 
general tariff had a maximum and a minimum rate, and while 
the minimum rate was allowed to other countries, the maximum 
rate was imposed on the United States. The United States 
was excluded from the " most favored nation " clause. This 
tariff was to go into effect on March i, 1906. Diplomatic nego- 
tiations and concessions on the part of the United States de- 
ferred the enforcement of the German tariff. 

The loss to American trade resulting from such a tariff will be- 
come evident, when we consider that, at that time, the trade of 
the United States with Germany ranked second among all the 
foreign countries. In 1902 United States exports to Germany 
amounted to $173,148,280. If the new German tariff had gone 
into effect, our exports to that country would have been con- 
siderably lessened, to the loss of our home industries. 

9. Protection does not increase the General Rate of Wages in a 
Country. — It is true that wages are higher in the United States 
than in any other country. Yet the mere fact of higher nominal 
wages does not necessarily indicate a better status of the laborer. 

Wages is a relative term. Wages bear an important relation 
to commodities for which they exchange. Wages are sought 
after, in order that when acquired they may be exchanged for all 
those things which make up the necessaries, the comforts, and 
the luxuries of life ; in fine, the products of all the several sys- 
tems of production. 

If the high wages of the laborer will not procure for him more 
articles than lower wages would, his condition is not bettered by 
the higher wages. But the number of articles for sale in the 
country is reduced by protection in two ways: first, by the 
diminishing of imports, which will be the necessary consequence 
of the tariff duties ; second, by the smaller output of the product 
from protected industries than from self-supporting industries. 
The supply of articles which can be procured by wages will thus 
be considerably lessened. The prices of things will rise because 
of the diminution of the supply. The prices will still further be 



264 



PROTECTION AND FREE TRADE 



raised by the tariff duties. Hence, not only will there be abso- 
lutely fewer articles to exchange for the wages of the laborer, 
but there will be relatively fewer, because a certain fixed amount 
of wages will not, by reason of the increased prices, be able to 
obtain as many of the articles as before. 



Table 



Free trade 
Protection 



No. OF 

Articles 



5000 
4000 



Price 



$.60 
$.90 



Wages 



)20 
)20 



Articles 
Procur- 
able BY 
Wages 



33^ 



22 



In the above illustration, the number of articles for sale are 
absolutely less under protection, as 4000 in comparison with 
5000. The number of articles procurable for a certain sum are 
relatively less, in view of the increased price, as 22f in compar- 
ison with 33^. 

Certain industries carried on in this country have been ex- 
tremely productive; an immense amount of product proceeds 
from a comparatively small amount of capital invested. Wages 
in these industries are inclined to be higher here than in other 
countries, and in agriculture particularly the wages of our farm 
laborers have always been higher than the wages of farm laborers 
in Europe. 

These very productive industries, such as agriculture, are able 
to pay high wages because of the great profit on the abundant 
product. Other industries, in order to secure labor, must com- 
pete with those high- wage-paying industries; they must offer 
wages at least equal to those paid by farmers, or they could not 
attract labor from the farming industries. 

Now, before the year 1789, when this country was on a prac- 
tically free trade basis, wages in the various industries then car- 
ried on in this country were higher than in European countries. 



EFFECTS AND PRINCIPLES OF PROTECTION 265 

Protection did not bring about that condition. The reason of 
it must exist elsewhere. Again, wages are higher in England, 
a free trade country, than in some countries where protection 
obtains. 

In 1880, of the total number of persons employed in agriculture, 
commerce, transportation, and professional services, there were 
about 15,400,000 who were not directly dependent for their 
employment on the tariff. About 1,990,000 were engaged in 
industries which were affected by the tariff rates, and even many 
of these industries could succeed though left to themselves. 
Now, it would be unreasonable to assert that the wages of these 
1,990,000 laborers could so influence the wages of the 15,400,000 
others, as to keep them permanently at a level fifty per cent 
higher than the wages paid abroad to foreign laborers. 

It is claimed by many, therefore, that wages are independent 
of tariff policy, whether it be for free trade or for protection. 
The cause of the high wages existing in the United States is to 
be sought for in the immense natural resources of the country, 
and in the energy and activity, the skill and inventiveness, of 
the people. To quote from a prominent writer : " What is the 
reason why wages are high in the United States? It is simply 
because nature has lavished her gifts as never before upon an 
intelligent, enterprising, and industrious people. Labor and 
capital, when government does not force them into unnatural 
channels, yield a larger return than in Europe. If you invest a 
capital of, say, $1000 and an amount of labor equal to 1000 days' 
work in America, you will receive a greater product, more bushels 
of potatoes or wheat or pairs of shoes, than in a country like 
Germany. There is consequently more to be divided among all 
those who take part in production than in the Fatherland, and 
of this greater plenty labor receives a share in higher wages." 
(Ely, Problems of To-day, p. 83.) 

While it cannot be said that the general scale of high wages 
in this country is due to protection, it must be admitted that in 
certain cases protective duties have enabled the industries helped 
by them to keep up their high standard of wages. 



266 PROTECTION AND FREE TRADE 

Protection has made these industries possible. The artifi- 
cially raised price of their products enables them to obtain a 
profitable return in proportion to the capital and labor invested. 
This return is divided into profits for the capital invested and 
wages for the labor employed. The amount of profits and of 
wages will depend on the price of the product, and this price 
depends on the tariff. If the protection should be taken from 
these industries, profits and wages would disappear. In other 
words, the capital would have to seek other industries or other 
channels of investment, and the laborers would have to seek 
other kinds of employment. 

If these industries were closed down by the withdrawal of 
protection, and especially if all the protected industries were 
obliged suddenly to retire from business, by a repeal of the tariff, 
much hardship would result and great disorder would ensue. 
Much of the capital would be lost, and ruin would fall upon many 
of the capitalists whose money had been invested. A great 
mass of laborers would be thrown out of employment, and would 
be forced to seek work in other industries for which they would 
be at first unadapted. This great increase of the supply of labor 
would cause the price of labor or wages to fall, and would un- 
settle all the industries in the country. 

It is claimed, however, that if there were gradual diminution 
of protective duties, the forces, capital and labor, would little 
by little accommodate themselves to the change, and it would be 
found that the general wages of the country would not per- 
manently or for any great length of time be affected. 

III. Arguments for Protection 

General Argument. — Just as there exists in a city a striving 
for existence and for a betterment of existence among the in- 
dividuals who compose the city, so there is a striving for exist- 
ence and for a betterment of existence among nations. The 
struggle for existence among the citizens of a city is carried on 
by each one's employing what faculties he has in whatever con- 
ditions surround him, in order to produce something of his own 



ARGUMENTS FOR PROTECTION 267 

which he may exchange for the things he desires. In society, 
each man gives out something of himself and receives from 
society something in return. He who gives, receives. 

And there is a perpetual competition among individuals, many 
offering to give what is desired, and each one of the many seeking 
to have his own product accepted. Hence the individual efforts, 
the invention of means, the use made of all one's resources, 
mental, moral, and physical, the making the most of advanta- 
geous circumstances often merely accidental, the taking advan- 
tage of the inefficiency or the failure of others. Life is fitly 
called a battle, and each one is engaged in a warfare. 

What goes on among individuals in a city, goes on in like man- 
ner among nations. Here again, each nation is giving something 
of itself in exchange for things possessed by other nations. 
Here again, there is a species of warfare, an invasion in which 
military strategy is replaced by commercial strategy, and the 
invading forces are not men, but products and articles of mer- 
chandise. 

International trade is the means employed by nations in this 
great struggle for national existence and national supremacy. 
But international trade does not confer equal and reciprocal ad- 
vantages upon all nations engaged in it. It may lead to the 
enrichment of the few and the ruin of the others. 

" International commerce," says Gide {Principles of Political 
Economy, p. 320), " when left to take care of itself, is liable to 
ruin the industry of a nation, to restrict or even to stifle its pro- 
ductive forces, and indirectly to endanger its very existence." 

To prevent the dangerous encroachments of other nations, to 
resist the monopoly of more advantageously placed rivals, a 
nation must make use of protection. Without restriction, a 
nation may be destroyed ; with protection, a nation may guard 
itself against its rivals, may restrain the hurtful competition of 
other nations, may bring about a balance between the advan- 
tages of its own inhabitants and those of other lands. 

More Specific Arguments. — The more specific arguments in 
favor of protection are as follows : — 



268 PROTFXTIOX AND FREE TRADE 

1. Protection makes possible a number of industries which 
without it could not prosper. The silk industry is a case in 
point. Silk goods coming into the United States are heavily 
taxed by the tariff. Without such tax the domestic silk indus- 
try could not exist. Yet the extent of the industry is very great. 
In 1905, the value of the silk product amounted to $133,288,072. 
The industry employed 79,601 laborers, had an invested capital 
of $109,556,621, and expended $26,767,943 in wages. 

Were the tariff taken off and silk goods allowed free entrance 
from France, Switzerland, and Japan, which countries, on ac- 
count of cheap labor and greater natural facilities, can produce 
silk goods more cheaply than the United States, the silk goods 
industries of the United States would cease. 

So it is of a great many other industries in the United States. 
If protection were to cease, the labor and the capital would have 
to seek other industries. They would have to seek out our self- 
supporting industries, such industries as enjoy natural facilities 
to a greater degree than other countries. But these industries 
in the United States, such as farming. Cattle raising, and cotton 
growing, are few, and if all the capital and labor had to be in- 
vested in them, very little profit could be gained from any one 
of them. There would be a glut of capital and an oversupply 
of labor in the country. They would have to seek other coun- 
tries. 

2. If a nation should be forced to apply itself only to occupa- 
tions for which the country offers special facilities, it would be- 
come stunted in its growth. We saw the disadvantage resulting 
to the laborer from the division of labor. Specialization in one 
kind of work in a factory hurts the individual by limiting the 
scope of his activity, by preventing his mental development, by 
reducing him to the nature of a machine. A similar effect will 
be produced, although on broader lines, on the whole nation, 
the activity of which is cramped by foreign competition, and the 
energy of which must be confined to a very limited number of 
industrial enterprises. The physical, mental, and moral develop- 
ment of the people will be retarded, and civilization will advance 



ARGUMENTS FOR PROTECTION 269 

with halting step. This is called the " variegated production " 
argument. 

3. Importation of foreign products, when not counterbalanced 
by exportation of home goods, drains the country of its money 
and makes it a debtor country. Moreover, when it has no more 
money to send out in payment for its imports, it must borrow 
money from abroad in the shape of loans, and thus further 
plunge into debt and hasten the moment of bankruptcy. Such 
has been the experience of Portugal and Turkey. Even though 
the effect of the outgoing of money from a country is to cause 
exports to increase, yet this cannot be effected without a general 
lowering of prices, which is in itself an evil for the country. This 
is called the '' balance of trade " argument. 

4. Customs duties are the best kind of taxes, because paid by 
foreign countries. They save the imposition of internal taxes, 
and the burden falls on the foreign merchant. This is known as 
the " taxation " argument. 

5. Protection is advantageous to the farmer no less than to the 
manufacturers. This is called the '' home market" argument. 
The reasons advanced to show that it is advantageous to the 
farmer are two : — 

First, because the farmer can find a market near by for his 
product in the industrial centers which grow up in his imme- 
diate vicinity. The establishment of these industrial centers is 
made possible by protection. The farmer is thus saved the ex- 
pense of the transportation of his bulky products to distant 
markets. Moreover, he procures in the industrial centers a 
neighboring market for the more perishable products of his 
farm, which would be injured by distant transportation. 

Second, because the farmer, by reason of the neighboring 
markets, can vary his cultivation and produce a number of 
products, instead of devoting all his land to one product. He is 
thus saved from the danger of impoverishing his soil. He is 
not so much exposed to complete failure, for, if one crop fails, 
others may succeed. 

6. Competition among home producers tends to lower the 



270 PROTECTION AND FREE TRADE 

price of the commodities produced. It is possible that trusts 
may be formed, which, by buying off all competitors and by 
absorbing all rivals, may secure an undisputed field and fix the 
prices at any figure they please. The laws, however, seek to 
prevent combinations made in restraint of trade and with the 
purpose of controlling prices. 

7. The greater the field that is opened for the labor of the 
country, the better will it be for the country. For labor is the 
source of wealth, and the more laborers there are actually em- 
ployed, the greater the production and the more the goods, the 
sale of which increases the wealth of the country. Now, under 
protective duties, many more industries are possible than under 
free trade. Protection creates industries, it fosters weak indus- 
tries, it hastens the establishment of industries, it keeps in ex- 
istence a large number of industries. Hence, protection in- 
creases the labor of the country. 

8. The aptitude for the mechanical arts, and the inventiveness 
displayed in the ingenious devices contrived for the easy pro- 
duction of great results, form a striking feature of the American 
character, which would find but little development were re- 
striction placed on manufacturing industries in the United States. 

9. It is better to employ American capital in the production of 
commodities which are needed by our own consumers, than to 
expend money abroad for the importation of the same commod- 
ities. In the former case, home capitalists are benefited by the 
returns made on their investments; home labor is employed, 
and the profits are kept within the country. In the latter case, 
foreign capital and labor are benefited, and much money goes 
abroad. 

This is the " double profit " argument. It may be put as 
follows : The tariff keeps two profits at home in domestic trade, 
the buyer and the seller, who each reap a profit, being United 
States citizens. Foreign trade gives but one profit, that of 
either the buyer or the seller, the other party being a foreigner. 

10. Protection, even though uneconomic, is justified for mili- 
tary and political reasons. It is a means of securing concessions 



ARGUMENTS FOR PROTECTION 271 

from other nations. It encourages the building of ships, ar- 
senals, and factories for munitions. 

11. The tariff may keep some of the natural resources of a new 
country from becoming quickly exhausted. 

12. There is no one theory of Political Economy that holds for 
every civilization. The same forces, no doubt, may be at work 
everywhere, but their relative importance will differ with each 
country. Now the United States, a great continental nation as 
it is, differs from all other nations. It is still a young country, 
endowed with endless internal resources. It is still in a dynamic 
state, differing from other countries, which have reached a static 
condition. The aim of such a country should be to develop as 
much as possible its natural resources. But this can be done 
only by the means hitherto adopted by the United States, viz., 
protection. (Cf. S. N. Patten, The Economic Basis of Protec- 
tion, 1890.) 

13. To the objection made by the advocates of free trade, that 
owing to the tariff, articles are sold cheaper abroad than at home, 
the protectionists answer that the practice of selling abroad 
cheaper than at home is carried on by all nations. This practice 
is not due to the tariff, they say, but to one or several of the 
following reasons: — 

Cash payments and large purchases in the foreign trade, 
whereas the domestic trade is based on credits and small 
purchases. 

The drawback or rebate of the tariff on imported raw material 
of goods manufactured for export. 

To overcome the tariffs of other countries. 

To secure new markets. 

To hold a market against new competitors. 

To clear out surplus stock or to prevent a shutdown or in- 
creased cost of production by keeping mills running and men 
employed. 

To get rid of samples and out-of-date goods. 

Because the expense of selling and advertising is less abroad 
than at home. 



272 PROTECTION ANQ FREE TRADE 

Even though the cheaper foreign price were due to the tariff, 
the amount sold at lower prices abroad is not five per cent of 
the total exports of manufactures. 

IV. Arguments for Free Trade 

The advocates of free trade answer the main arguments of the 
protectionists (i-6, following) and then present specific argu- 
ments for free trade (7-20, following). 

1. The '^ infant industry " argument strenuously advocated 
at one time by protectionists is now invalidated because pro- 
tection was not withdrawn after the infant industries had at- 
tained their maturity. On the contrary, protection is still 
defended; but, whereas formerly protection was declared to be 
needed because this new and young country had to repel the 
competition of foreign lands and prevent itself from being 
crippled by wealthy nations, now, when the United States has 
grown wealthy, it is declared that protection is needed against 
the cheap labor and the cheap products of foreign lands. 

Again, European nations declare that they need protection 
because they are old and must compete with new countries. 

An argument that can be so twisted about and be made to 
serve in both cases can have very little intrinsic worth. 

2. The argument that protection diversifies the industries 
of a country may be admitted, but this same result would follow 
spontaneously and with less attendant hardships under free 
trade. Labor is scarce in a new country and industries are 
necessarily circumscribed, but gradually the population in- 
creases, laborers become more numerous, industries grow in 
numbers and diversity. Protection brings about this result, but 
effects it at the price of very onerous conditions ; capital and 
labor are deflected to less profitable industries ; there is a gen- 
eral rise of prices which must be paid by the home consumers ; 
the cost of production is increased. 

It is impossible to believe that, with resources so abundant, 
with so favorable a geographical position, with a people so in- 



ARGUMENTS FOR FREE TRADE 273 

dustrious and inventive, this nation would not, though unaided 
by any protection, arrive in time at the front of all competition 
and outstrip all foreign nations. Without protection the result 
might be delayed, but there would have been more markets for 
our goods, commodities would have been cheaper, and the vast 
army of laborers would have been able to get relatively more 
for their wages. 

3. The " balance of trade " argument is futile, because ex- 
ports and imports tend to equal each other. When exports 
exceed imports in a country, money flows into the country. 
Prices will rise. The country will become a poor market for 
foreigners to buy in, and exports will decrease. The exports 
will not long remain in excess of imports, and the supply of money 
will not be permanently increased. 

4. The " taxation " argument is false, if not wholly, at least 
in great measure, because foreigners pay but a small share of 
the tariff rates. Ultimately, the burden falls on the home con- 
sumer. And even if the argument be admitted, other nations, 
by their protective duties, will impose on us the burden of paying 
their taxes. 

Furthermore, if the price of the foreign article is not raised, 
and if the foreigner really pays the tariff rate, protection has 
missed its aim. The object of the protective duty was to ex- 
clude the foreign article by forcing a rise in its price. If, then, 
the price is not raised, because the foreign producer bears the 
burden, foreign competition is not prevented and protection is 
ineffective. 

5. To the argument of the protectionists, that under protec- 
tion producers are enabled to sell their products in neighboring 
markets and thus save the great expense of transportation, it is 
asserted that, owing to the increased facilities of our railroad 
systems and the low freightage by rail and steamship due to 
increased competition, the cost of transportation is compara- 
tively small. Moreover, the burden of paying the transporta- 
tion charges is borne in greatest part by the foreign consumer. 
Otherwise, it would not be profitable to export. 

POL. ECON. — 18 



274 PROTECTION AND FREE TRADE 

I 

6. Protection raises the prices of all commodities at home. 
The price of the foreign article is increased by the tariff duty. 
The home producers fix their price slightly below the price of the 
foreign article. Thus, all prices are artificially raised, and the 
burden falls on the consumer. 

Even when increased efficiency has made it possible for home 
producers to reduce the cost of production, and thus reduce the 
price of the product, they seldom do so ; instead, it is possible 
for combinations to be made to keep the price at the former 
level, in order to secure wholly unreasonable profits. Free traders 
assert that this is done, and in proof they point to the fact that 
many of our home products are sold abroad at lower prices than 
at home. 

7. Protection increases the cost of living and prevents a 
decrease in that cost. Living is cheaper in England and in Bel- 
gium, free trade countries, than in France or the United States. 
Under protection the price of all commodities is raised. The 
consumer pays yearly an immense sum to the producers. 

8. Protection is class legislation. The producers are benefited 
at the expense of the consumers. 

9. Protection injures national production by increasing the 
cost of raw materials, implements, machinery, and the many 
things which enter into productive enterprises. 

10. Protection reduces imports and consequently ex- 
ports. 

11. Protection injures and hinders industrial progress by 
cutting off foreign competition. 

12. International trade is like internal trade. The freedom 
of our internal trade is the great source of its extraordinary ex- 
pansion ; so, the more free our international trade is, the greater 
will be the advantages for home and foreign producers. There 
will be more consumers for goods. 

13. Under free trade every one is able to buy in the cheapest 
market and sell in the dearest, so that the gains of all will be at 
a maximum. 

14. Under free trade, every nation will be able to develop to 



ARGUMENTS FOR FREE TRADE 275 

the utmost its natural advantages, and the world's wealth will 
be increased. 

15. Protection involves political corruption. 

16. Protection brings about national animosities and tariff 
wars. 

17. Protection does not increase wages. More capital is 
wasted in materials and less is to be had for wages. Moreover, 
it raises prices for consumers and thus counteracts any increase 
of wages. 

18. Protection fosters trusts with all their attendant evils. 

19. Protection extorts high prices at home, where it has a 
monopoly, and sells to foreigners at lower prices. Adam Smith 
declares that this is inevitable under the protective system. 

20. Protection makes orderly public finance impossible. 
There are huge revenues and extravagance. 

QUESTIONS 

1. Give a brief historical sketch of protection in the United States. How 

was the policy of protection introduced in the United States ? 

2. Mention the principal tariffs. 

3. What tax was imposed by the Payne tariff law? 

4. What are the important provisions of the Underwood bill ? 

5. Show by example how protection increases the industries of a country. 

6. What is the effect of protection on labor and capital ? How does it 

establish less productive industries in place of more productive in- 
dustries ? Give examples. 

7. Why should protection be temporary? 

8. Show by examples how the burden of raised prices falls on the con- 

sumer. 

9. Why should protection be limited ? 

ID. How does protection reduce foreign trade? 

11. How does protection tend to cause international animosities? 

12. What is your opinion about the connection between protection and 

wages? Does protection raise wages in a country? 

13. Give the main arguments for protection. 

14. Give the main arguments for free trade. 



CHAPTER XV 

TRANSPORTATION. RAILROADS 

Transportation aids Production. — Transportation is an aid 
to production, and hence it takes its place in this division of 
Political Economy. It was formerly thought that transporta- 
tion had no part in production. It was claimed that only those 
agencies were productive which actually created materials. The 
mere transporting of materials already existing from one place 
to another was not considered as in any way entering into the 
idea of production. 

But transportation really has the effect of creating new values 
in certain objects, of practically creating valuable materials out 
of materials which otherwise would have had no value and con- 
sequently no economic existence. Commodities which are pro- 
duced in great abundance in one place and which, because of 
slight demand, would have little or no value there, are trans- 
ported to other places where the demand is great, and hence 
acquire value. Change of place gives value. 

Transportation, again, produces wealth, because it makes pos- 
sible countless industries which otherwise could never be under- 
taken. The facilities of transportation over roads or waterways 
are among the greatest advantages a country or town can have, 
and they have caused the wealth and prosperity of many of the 
great commercial centers. The coast towns of Europe and of 
the United States owe their commercial progress to their loca- 
tion. The same may be said of the flourishing cities built along 
the great rivers and lakes of our country. The Erie Canal 
through New York state has brought wealth to the towns along 

276 



KINDS OF TRANSPORTATION 277 

its course. It would be difficult to estimate the value, to the 
cities of the Mediterranean, of the Suez Canal, opening to them, 
as it does, all the markets of the East. And in our own day 
we have been able to see the advantages to the mid-continent 
countries that are derived from the Panama Canal. The proj- 
ect now earnestly advocated, of opening up the Mississippi so 
that ocean vessels could reach the ports along that great water- 
way, would prove of incalculable value to all the middle section 
of our country. 

Kinds of Transportation. — There are various means service- 
able for transportation — dirt roads, made roads, canals, rail- 
roads, with the conveyances which may be respectively used — 
carts, wagons, boats, barges, cars. The method of transporta- 
tion to be constructed between any two points will depend on 
the traffic. 

It would not be economic to build a concrete or macadamized 
road where, on account of the small amount of the traffic and 
the rough nature of the transportable materials, a dirt road would 
be amply sufficient for the safe transportation of the commodi- 
ties. Nor will a railroad economically replace a turnpike unless 
the traffic is large and valuable enough to warrant the expensive 
outlay and give promise of sufficiently reasonable profits for 
the investment. 

The natural waterways, rivers, lakes, and oceans, are the 
cheapest means of transportation, and an enormous amount of 
merchandise is shipped in this way. Transportation by water 
is used even when it would be possible to use railroads, as along 
the coast and on rivers. Certain classes of merchandise not 
perishable and not of immediate need at the points of destination 
can be sent cheaper by water than by rail. 

Canals are cheap, one cent a ton mile .being considered a pay- 
ing rate. They compete with railroads when there is question 
of heavy, slow-moving freight. In temperate climates, how- 
ever, they are subject to changes of the seasons, ice in winter 
and droughts in summer impeding and at times wholly stopping 
their efficiency. 



278 RAILROADS 

Growth of Railroads. — Railroads have, during the past 
fifty years, made immense progress in the field of transportation, 
and almost wholly monopolize traffic in regions where no v/ater- 
ways exist, superseding the pack mules and wagons of the past, 
and even along the waterways competing with canals, rivers, 
oceans, and lakes. They offer the advantage of rapidity of 
transportation, an essential item in the case of many kinds of 
perishable goods Owing to the immense amount of business 
done, they can afford to lower the rates or charges to a very rea- 
sonable figure, while, owing to improvements made in road- 
building, in cars, and in general equipment, they invite traffic 
by the safety and facilities offered. 

Railroads have a special advantage over waterways in being 
able to choose their own routes, to pass over, around, or under 
mountains. They are besides more certain and more constant, 
being less subject to climatic conditions, and better able to 
remedy quickly any material disasters which they may have 
suffered. 

Because of these and many other advantages, railroads in 
every important country of the world have increased enor- 
mously in number, in length of fines, in equipment of cars and 
engines, but nowhere to such an extent as in the United States. 

It will be interesting to note the number of miles of railroads 
in our own and foreign lands. The figures may help us some- 
what in understanding the importance of the railroad question, 
now so prominently before the public attention. 

Miles of Railroad 

1920 Europe 210,110 

America . 367,544 

Asia - 71,555 

Africa 28,829 

Australia 24,988 

World 703,026 

{Railway Statistics of U. S., 1920.) 



COST OF RAILROADS 279 

The railroad growth in the United States, by decades, was : — 



Year 


Miles 


Year 


Miles 


1830 

1840 

1850 

i860 

1870 


23 

2,818 

9,021 

30,626 

52,922 


1880 

1890 

1900 

1910 

1918 


93,262 
167,191 
198,964 
249,992 
264,233 



(Cf. Stat. Abstr., 1920, p. 811.) 

Cost of Railroads. — The building of railroads is much cheaper 
in the United States than in other countries, as may be seen 
from the following table : — 



Year 



1909 . . 

1908 , . 

1908 . . 
I 908-1 909 

1908 . . 

1908 . . 

1909 . . 
1907 . . 
1909 . . 
1909 . . 



Country 



United Kingdom 

Belgium 

France 

Italy 

Austria 

Switzerland 

Germany 

Russia 

Canada 

United States 



Average Cost of 

Construction 

PER Mile 



$274,964 
180,860 
141,920 
125,205 

115,130 
114,461 

111,737 
79,136 
64,740 

59,259 



(Cf. Railway Statistics of U. S., 1911, p. 67.) 

Conditions affecting Railroad Building. — The conditions 
affecting the building of railroads in the United States have been 
quite different from those obtaining in Europe. When the 
construction of railroads began in the several countries of 
Europe, those countries were for the most part well populated. 
The cities, towns, and hamlets, the productive regions, the 
various manufactories and centers of trade had been already 



28o 



RAILROADS 



established for a long period. The builders of railroads had 
but to take a map of the country and draw the various lines of 
road uniting great cities, connecting the main markets with the 
productive belts and the industrial centers. Sufficient capital 
had to be procured to buy up numerous estates and properties, 
and to secure the right of way through town and hamlet. The 
roads were built through the midst of civilization. 

Not so in the United States. Here frequently the railroad 
was the pioneer of civilization. Forests were hewed down, hills 
leveled, valleys built up and the tracks laid out into a wilderness 
with a terminal thousands of miles distant and to be reached 
possibly only in the next generation. 

In Europe, an existing traffic was to be accommodated by the 
railroads; in the United States, traffic was to be established. 
In Europe, the towns and stations were linked together by the 
lines ; in the United States, towns and stations, which gradually 
grew into cities and towns, were to be established along the 
newly built road. 

The railroads themselves encouraged and aided the civiliza- 
tion of whole tracts of country, in order to increase their traffic. 

In Europe, there was no competition between various roads. 
If one line sufficed for the traffic, only one was built. In the 
United States, competition was rife, and sometimes attempts were 
made to build even two or more direct lines between two points. 



Group 


Mileage 


Stocks 


Bonds 


Vanderbilt 

Pennsylvania 

Harriman 

Hill-Morgan 

Morgan 

Gould 

Moore- Reid 

Rockefeller's 

Walters' 

Hawley 


24,810 
19,840 

28,751 
13,110 
13,212 

21,341 
27,910 
16,309 

11,143 
12,310 


$620,300,000 
768,300,000 
951,600,000 
386,600,000 
568,220,000 
533,408,000 
364,500,000 
253,700,000 
147,600,000 
339,688,000 


$ 754,900,000 
569,700,000 
1,235,500,000 
422,900,000 
540,915,000 
814,600,000 
482,900,000 
310,500,000 
199,300,000 
520,400,000 



GROUPS OF RAILROADS 



281 



Groups of Railroads. — Competition is naturally followed by 
consolidation, and hence several great groups of railroad systems 
have been gradually built up in the United States. These 
groups may be seen in the preceding table. 

Business of Railroads. — The business of the railroads in this 
country is enormous, and entails an immense outlay of money 
to meet the expenses and the interest on the capital invested. 
This may be seen by consulting the following tables. 

Table I 



Year 



1882 
i8go 
1900 

1905 
1910 
1918 



Passenger 
Mileage 



Miles 



Freight 
Mileage 



Miles 



In millions 



10,484 
12,521 

16,313 
23,906 

32,388 
42,676 



39,302 

79,192 

141,162 

187,375 
256,682 

405,379 



Traffic Earnings 



Gross 



Net 



In millions of dollars 



764 
1,086 
1,501 
2,112 
2,804 



278 
242 

483 
685 
919 



(Cf. Poofs Manual of Railroads, 1911. Cf. Stat. Abstr. U. S., 1920,) 



Table II 



Year 



1880 
1890 
1900 

1905 
1910 
1918 



Mileage 



93,262 
167,191 
198,964 
225,196 
249,992 
264,233 



Capital 


Debt 


Cost 


Stock 


Bonded 


Float'g 


Total 





In millions of dollars 


2,708 


2,530 


162 


4,590 


5,055 


375 


5,804 


5,758 


328 


6,741 


7,821 


201 


8,380 


10,510 


455 


9,055 


11,729 





5,402 

10,020 
11,891 

14,563 



Con- 
struction 
Per Mile 



$58,624 

61,343 
61,884 
68,038 



(Cf. Poor's Manual, 191 1. Cf. Stat. Abstr. U. S., 1920.) 



282 



RAILROADS 



Table III 



Year 



1890 
1900 

1905 
1910 
1918 



Interest 



^2 2 1, 000, 000 
252,000,000 
310,000,000 
399,000,000 
396,000,000 



Dividends 



5 87,000,000 
140,000,000 
238,000,000 
405,000,000 
339,000,000 



(Cf. Stat. Abstr., 1920, p. 340.) 



Table IV 



Year 



1894 

1900 

1905 
1910 
1918 



Number Employees 



779,608 

1,017,653 
1,382,196 
1,699,420 
1,837,663 



Compensation 



5 447,000,000 

577,000,000 

839,000,000 

1,143,000,000 

2,606,284,245 



(Stat. Abstr., 1920, pp. 353, 354.) 



Railroads as Private Concerns and as Public Concerns. — 

In other countries the railroads for the most part are govern- 
ment concerns wholly or in part. In the United States they are 
private, because 

1. They have been organized and are managed by private 
individuals. Such men as Vanderbilt, Morgan, Hill, Harriman, 
have been the great promoters of the railroads of the country. 

2. They have been capitalized by private capital. This capi- 
tal is owned by thousands of private individuals who hold the 
stocks and bonds of the railroads. Trustees invest their trust 
funds in railroads. Banks so invest the money of their deposi- 
tors. Insurance companies and educational institutions hold 
many stocks and bonds of railroads. 



RAILROADS AS PRIVATE AND PUBLIC CONCERNS 283 

Value of railroad securities held (about 1906) — 

By Insurance Companies $ 845,889,038 

By Savings Institutions 571,031,277 

By Educational Institutions 47,468,327 

Total $1,464,388,642 

(Cf. Newcomb, Facts about Railroads, p. 92.) 

Railroads, however, are in some respects public concerns. 
(Cf. Fetter, The Principles of Economics, p. 534 seq.) Rail- 
roads have been granted by charter or by franchise the right of 
eminent domain. This right is not enjoyed by private manu- 
facturers. 

The primary object of railroads is to benefit the community, 
and it was for that purpose that they were given material aid 
by the various state governments. Money and land were be- 
stowed on them. They were granted privileges by states, cities, 
and towns, in the competition that existed, to secure the ad- 
vantages of railroads. Bonds, bonuses, exemptions from taxes 
were granted by counties, townships, and cities. 

The national government followed the same policy. It 
granted large tracts of public lands to the railroads. In 1850 
a great strip of land from north to south in Illinois was given 
by the United States government to Illinois for the Illinois 
Central Railroad. In fourteen states, over ten million acres of 
land were given to the railroads. Between 1862 and 1871, the 
United States government aided the Pacific railroads by a grant 
of twenty square miles of land for every mile of track, and by 
a loan of $50,000,000. 

Consequences of these Two Facts. — There are certain con- 
sequences flowing from the fact that the railroads are at once 
private and public concerns. 

As private concerns, the managers and owners of railroads 
are to be encouraged by the government in the carrying on of 
the railroad industry, just as other private concerns are en- 
couraged. Special restrictions, unjust and overbearing, crip- 
pling and destructive of enterprise should no more be allowed in 



284 RAILROADS 

regard to railroads than in other private concerns. The capital 
invested is entitled to a certain just remuneration for its use and 
for the risks run by the capitalists. Arbitrary and extreme 
measures that tend to impede and stultify the efforts of the able 
managers of railroad business, and cut off the returns due to their 
ability and shrewdness, will work injury not only to the few 
millionaire owners of the roads but to the thousands of poor 
and moderately wealthy, whose money is invested in railroad 
stocks and bonds. 

As public concerns, the railroads owe a duty to the public, 
which must be superior to the duty owed to private stockholders 
and owners. Railroads must be looked on from a social, rather 
than from an individual, point of view, and they should not sub- 
ordinate public interests to private gain. They should observe 
the conditions on which in most cases the special charters and 
franchises and great privileges were granted them. These 
conditions by implication, if not explicitly, guaranteed the rights 
of the public. 

The main difficulty in this matter consists in harmonizing 
the consequences that arise from the twofold character possessed 
by the railroads, as private and public concerns. The effort 
to do so is being made to-day in this country. 

There are the two extremes. Some hold that railroad cor- 
porations are merely private businesses similar in their private 
character to all other private manufacturing and productive 
enterprises. They contend that, just as any governmental in- 
tervention looking towards regulation or management of private 
industries would be considered an act of unwarranted tyranny 
and injustice, so also any effort of the government to meddle with 
railroad business or management must for similar reasons be 
condemned. 

Others hold that railroads are purely public utilities that owe 
their existence to the beneficence of governments, which have 
conceded to them vast areas of land, valuable privileges and 
franchises, the undoubted property and prerogatives of the 
public. As public utilities, they owe their first duty to the 



POWER OF RAILROAD MANAGERS 285 

public. Since, however, they have come to be controlled by 
unscrupulous owners and directors, who seek only the increase 
of dividends and ignore the rights of the public, there has 
arisen imperative need that the government determine the limits 
of their power, regulate their management and service, and put 
an end to recognized abuses. 

These two extremes will always have their defenders, yet the 
general public opinion is gradually sifting the matter, and there 
is being formed a view that lies midway between the two ex- 
tremes and would reconcile both, safeguarding at once the 
rights of the railroads and of the public. 

Power of Railroad Managers. — The outcry against the rail- 
roads seems to have a certain foundation when one considers 
the power that resides in the hands of the railroad managers. 

They have power to affect prices by the traffic rates imposed 
on all classes of commodities. They may build up or destroy 
towns and cities, and even whole territories, by changing routes 
or by regulating the service of their roads. They may crush 
wholly the business of private individuals who may have 
incurred their enmity. They may enter into and take part in 
commercial wars that exist between rival interests and may 
support the one and destroy the other. 

They maintain, it is claimed, lobbies in the federal legislature 
and in all the state legislatures, with the purpose of taking note 
of the legislative measures brought forward by these bodies, and 
they may by bribery and intiinidation procure the passage of 
bills favorable to their interests and prevent the passage of laws 
inimical to them. 

By the establishment of construction companies, whose heads 
may be the directors of the roads, the directors may find means 
of enriching themselves. Stockholders' interests are held to be 
paramount. Dividends must be paid, no matter how the money 
is got. Often the service of the road suffers, the wages of the 
employees are reduced, and the prices of service raised, in order 
to secure the means of paying the dividends. 

If the manager of one road is powerful, how much more so 



286 RAILROADS 

will he be if he can acquire other roads! Hence consolidation 
is sought. To-day five interests own 50 per cent of the railroads 
of the United States. 

Overcapitalization. — Overcapitalization may be resorted to, 
with the result that prices will be raised and must be paid by 
the users of the railroad service. 

Overcapitalization exists when the capital is arbitrarily 
raised to a figure over and above the actual and real value of 
the possessions of the railroads. For example, the franchise 
rights, rolling stock, stations, terminals, roads, etc., of a railroad 
company may be fairly worth twenty millions of dollars, and 
the capital should 'be fixed at that figure. But if the capital 
is raised to forty millions of dollars without any increase of 
property, by giving to the stockholders additional shares for 
which no actual money is paid, we should have a case of over- 
capitalization. 

The profits of the road, which rightfully should pay dividends 
on the twenty millions of actual capital, must now pay divi- 
dends also on the fictitious twenty millions of capital that have 
been arbitrarily added to the real capital. Thus the profits 
will be consumed, and, if not sufficient under ordinary circum- 
stances, they must be increased by exorbitant prices charged 
for the trafiic service of the road. 

In a discussion carried on in Congress in 1906, it was asserted 
that American railroads were overcapitalized to an enormous 
extent, and that thence arose the exorbitant charges for trafiic 
against which the shippers were protesting. 

The assertion was vigorously contradicted by defenders of the 
railroads. The agitation, however, brought about the intro- 
duction of a clause in the railroad bill that would allow the Inter- 
state Commerce Commission to investigate the condition of the 
various railroads and to ascertain the fair value of the property 
of every railroad engaged in interstate commerce. The object 
of the bill, it was declared, was to conserve and protect, not to 
injure, the efficiency of the roads. The bill passed the House 
(May, 1910), but this particular clause of the bill calling for the 



RAILROAD CHARGES 287 

physical valuation of railroads was rejected by the Senate 
(June I, 1 9 10). Finally, on March i, 191 3, a bill providing 
for the physical valuation by the Interstate Commerce Com- 
mission of railroads, express companies, telegraph and tele- 
phone companies, such valuation to serve as a basis for rate 
regulation, was signed by the President and became a law. 

The task is a huge one and difficult to perform in such a way 
as to obtain a satisfactory basis of evidence for the determina- 
tion of equitable rates. The investigation will require a de- 
tailed examination of all the various real properties owned by 
the roads, and when to these items there are added the in- 
tangible franchise rights and opportunities of the roads, it will 
be clear how difficult it must be to arrive at definite figures in 
the final calculation of the value of the roads. 

Railroad Charges. — ■ One of the most difficult problems in 
the railroad business is the calculation of the charges or rates to 
be made for railroad service. The difficulty consists in finding 
a common basis for all the individual services rendered. In 
determining the price of commodities, the basis taken is the cost 
of production. The price is brought more or less near the cost 
of production. No such basis exists for rates and charges in the 
railroad business. 

It has been claimed that the cost of service might be taken as 
a basis for charges. This would not prove practicable, for it 
would be almost impossible to estimate the cost of service. At 
times, the preponderance of the freight-carrying business may 
be from terminal to terminal over long distances — through 
freight; at times, it may be local. The changing conditions 
would be subject to no law, and yet the cost of service would 
vary according to these varying conditions. 

The railroad expenses which the charges have to meet are the 
operating expenses and the interest to be paid on the capital 
invested. The interest is estimated to amount generally to 40 
or 50 per cent of the total expenses. The operating expenses 
are divided under various heads, part of which will vary ac- 
cording to the amount of trafiic, an item which can never be 



288 RAILROADS 

accurately calculated. Where such changeable conditions 
exist, it must be almost a hopeless task to estimate the value 
of the service and the relation it ought to bear to the total 
expenses. 

Again, the cost of service in transporting a train load of mer- 
chandise to any point will vary according to whether the cars 
return to the starting point loaded or empty. Cars returning 
loaded would partly compensate for the first transportation; 
cars returning empty would be a loss to the road. 

Moreover, it costs more to move a thousand dollars' worth of 
coal than a thousand dollars' worth of silk goods, yet it would be 
impossible to charge the coal at the rate of the cost of service. 
If the charge of the silk goods were determined by the cost of 
service and the charge for the coal were fixed proportionately to 
the charge of the silk goods, the charge would be so great that it 
would prohibit the transportation of coal. In like manner, the 
charge for transporting New Jersey wheat to New York might be 
determined by the cost of service, but if the New Jersey rate 
were charged for carrying Dakota wheat to New York, the 
charge would be so high that it would not pay to transport 
Dakota wheat. 

Rates, then, are not determined by the cost of service. 

The railroad is a monopoly. It can fix monopoly prices for 
its service. It is influenced in fixing its rates by self-interest. 
This self-interest leads it to increase its traffic as much as 
possible, and consequently it charges '' what the traffic will 
bear." 

To illustrate, let us take the case of Dakota wheat shipped to 
New York : — 

Cost of production to the Dakota farmer $.ioa bushel 

Price of wheat in the New York market 60 a bushel 

Railroad charges — Dakota to New York 20 a bushel 

Cost of production and transportation to farmer 30 a bushel 

Profit to farmer 30 a bushel 

The railroad might charge 30 cents or 40 cents for transporta- 
tion, but it is prevented : — 



RAILROAD CHARGES 



289 



1. Because of the competition of other lines. This competi- 
tion, however, is often avoided by pooling and combinations. 

2. Because the railroad desires to increase its trafiSc in wheat. 
The lower the rate, the more wheat will be shipped, and the more 
profit the road will make. 

The amount that shall be charged by the railroad is thus 
described : " The amount of the charge for any particular serv- 
ice is the product of a definite rate applicable between the 
points of origin and destination, or for the distance traversed, 
and to the commodity or class of passengers carried, multiplied 
by the number of persons or the weight of the freight." {Encyc. 
Amer.) 

Rates are lower in Europe for passengers than in the United 
States, but this is due to the fact that there are several classes, 
first, second, and third, in the passenger service, and as a rule 
the service is much less satisfactory. 

It has hitherto been generally conceded that the rates in this 
country have not been excessive, and during the twenty-five 
years prior to 19 10 there had been a gradual decrease in freight 
rates, because of the introduction of better methods and a more 
economic administration of transportation. 

The passenger rates have been but little changed in the same 
period as compared to freight rates. 



Year 



1885 

1890 

1895 
1900 

1905 
1909 
1918 



Freight Rates 
Per Ton 
Per Mile 



Cents 
I 057 
0.927 
0.839 
0.746 
0.784 

0.757 
0.849 



Passenger 

Rates 
Per Mile 



Cents 
2.199 
2.174 
2.069 
2.031 
2.028 

1-934 

2.414 



(Cf. Stat. Abstr., 1920.) 
POL. ECON. — 19 



290 RAILROADS 

Many concessions have been made by the railroads. Mileage 
books are issued. Suburban passengers are treated to whole- 
sale terms. Wholesale rates are given to conventions. 

Rating introduces two important elements into railroad busi- 
ness, classification and discrimination. 

Classification. — Classification is the apportionment of com- 
modities into different classes determined by various conditions 
of traffic accommodation, the nature of the commodity, the 
quantity of the commodity in different sections of the country, 
and the naming of a fixed price or rate for each class in trans- 
portation. 

Classification may have reference to passengers, who are 
carried way or express, ordinary or Pullman, but it generally has 
reference to freight. 

Classification is determined (i) by the nature of the com- 
modity: local or through; carload or not so; cheap goods or 
dear goods. 

(2) By conditions of accommodation: special cars (refrigera- 
tors, oil tanks, coal cars) ; the need of facilitating new traffic ; 
the manner of packing (live stock, crockery, powder). 

(3) By the quantity of the commodity in different sections of 
the country : shoes in New England, wheat in the West. 

Classification is necessary, as may be seen from the variety 
of the commodities carried by the railroads : — 

Tons 

igi8 I. Agricultural products 9.9 per cent of traffic 

2. Animal products 2.7 per cent of traffic 

3. Mineral products 54.8 per cent of traffic 

4. Forest products 8.3 per cent of traffic 

5. Manufactures 16.3 per cent of traffic 

6. Merchandise t^.j per cent of traffic 

7. Miscellaneous 4.3 per cent of traffic 

(Cf. Stat. Abstr., 1920, p. 342.) 

These seven heads embrace between 9000 and 10,000 kinds of 
commodities. It would be impossible to have rates for each 
commodity. Hence, general classes are made out. 



DISCRIMINATION 291 

There are three main classifications : — 

1 . Official — east of the Mississippi and north of the Ohio 
and the Potomac. It has 8 classes. 

2. Southern — east of the Mississippi and south of the Ohio 
and the Potomac. It has 15 classes. 

3. Western — west of the Mississippi. It has 10 classes. 
There is also the transcontinental classification, used for 

freight between the Atlantic and the Pacific. Again, a 
special classification embraces commodities destined for export 
trade. 

There are also the " special commodities " rates, issued by 
railroads to help some special new commodity. There are over 
1000 such special tariffs. 

Several states have special classifications, made by state legis- 
latures or state commissions, as Illinois, North Carolina, Florida, 
Iowa, Georgia. 

A single uniform classification would be better for trade, be- 
cause the transportation costs could be computed by the ship- 
pers and discriminations could be more easily detected. But it 
does not seem practicable. 

Discrimination. — Discrimination is the granting of special 
favors in regard to rates or accommodation to certain individuals 
or localities. It is of two kinds : personal and local. 

Personal discrimination may be practiced by the granting of 
free passes to passengers, or by charging different rates and 
according different accommodations to different persons. 

The causes that lead to personal discrimination may be — 

(i) a desire to build up a new business which may need spe- 
cially low rates in order to exist or as an inducement to put its 
product on the market ; 

(2) the competition which exists between railroads, each of 
which strives to secure the transportation trade of wealthy 
producers ; 

(3) the attempt to gain the good will and assistance of large 
shippers, whose influence in railroad legislation and railroad 
grants may be of moment ; 



292 RAILROADS 

(4) the desire to build up a business in which the railroad 
officials are interested. 

Local discrimination exists when railroads favor one locality, 
town, city, or section of country more than another, in the 
matter of rates or in the granting of accommodations, fast trains, 
exact schedules, or suitable cars. Through such discrimination, 
local rates are high, through rates low ; domestic trade is made 
to pay a high tax, while foreign trade is allowed cheap rates; 
one seaboard city may have to submit to exorbitant charges, 
while another is specially favored in the charges. 

It is not easy to find all the various causes that lead to local 
discrimination. Some of the causes, however, are: — 

(i) Water competition, as when boat lines and barges and 
steamers, coastwise and on lakes and rivers, compete with rail- 
roads and lead them to reduce charges between points that enjoy 
such waterway advantages. 

(2) Better terminal facilities in one city than in another, 
affording the means of shipping goods abroad. 

(3) The competition of other lines of railroads. 

(4) The influence of powerful corporations and favoritism 
shown by the railroads. 

(5) Trade competition and rivalry between communities, 
leading them to grant special favors to the roads in the assured 
hope of receiving special favors from the roads in return. 

The effect of any kind of discrimination is to cause uncer- 
tainty, fear, and danger in business. In all businesses, trans- 
portation cost enters as an important item and must be calcu- 
lated in estimating the amount of capital required, the outlay 
for wages and salaries, \ he amount and cost of product ; and 
when the transportation charges may be changed at the will of 
the railroad officials and made excessive for personal or local 
reasons, no certainty of one's financial standing can exist, 
and no assurance of ability to fulfill contracts. 

Discrimination may build up one man's business at the ex- 
pense of another ; it may build up or it may destroy fortunes, 
cities, towns, and even whole districts of the country. 



QUESTIONS 293 



QUESTIONS 

How does transportation aid production? How does it affect the 
wealth of a country? 

What determines the building of different kinds of roads for transpor- 
tation ? 

How do railroads in the United States compare with railroads in for- 
eign countries in regard to growth? 

How would you account for the different costs of construction per mile 
of roads in the United States and in other countries ? 

How did the conditions of road building in the United States differ 
from those in other countries ? 

Mention the principal groups of railroads in the United States. From 
a study of the tables given (pp. 281, 282) estimate the amount of 
business done by the railroads. 

7. Why are railroads private concerns? Why public concerns? What 

consequences flow from the fact that railroads are at once private 
concerns and public concerns ? 

8. Explain how the railroad managers acquire power. 

9. What is overcapitalization? What are the difficulties in the way of 

estimating the physical valuation of railroads ? 

10. Why is cost of service not the basis for determining railroad charges? 

On what principle are railroad charges made ? What is the general 
opinion with regard to railroad rates in this country? 

11. What is railroad classification? How is it determined? What are the 

main classifications ? 

12. What is discrimination? What are its kinds? Its causes? 



CHAPTER XVI 

REMEDIES FOR RAILROAD EVILS. GOVERNMENT 
OWNERSHIP OF RAILROADS 

I. Remedies for Railroad Evils 

Evils of Railroads. — Classification is not objected to, where 
there is evident reason for it. Such reason exists, for example, 
when there is greater risk attendant on the traffic, when break- 
able or perishable goods are moved and special care is required 
in their handling ; when live stock is carried, demanding extra 
labor on the part of the employees. Frequently, however, the 
classifications scheduled by the railroads are arbitrary, hap- 
hazard, discriminating, and unjust, and then classification may 
be a real evil. 

Discrimination, both personal and local, is the main evil of 
railroads. It is against this evil that the greatest outcry has 
been made. 

The shippers who must use the roads for the transportation of 
their products are at the mercy of the carriers, and can be 
driven out of business by the exaction of unfair or exorbitant 
rates. 

Rebating is an evil which consists in the railroads returning 
some portion of the public scheduled charges to a shipper, 
so as to discriminate in his favor in the matter of rates. Some 
producers use their own cars in shipping their goods, and this 
opens the way to discrimination, as the producers claim a rebate 
because the railroad does not supply the rolling stock. Some 
125,000 cars are thus owned by producers. The tendency at 
present is for the railroads to own all the cars moved by them. 

As already stated, the amount of the rates charged by rail- 
roads for transportation has not generally in the past been 
considered a serious evil. The rates themselves, when there 

294 



REMEDIES 295 

existed no discriminatory feature in them, have been as a 
rule considered reasonable. 

But in the year 19 10, a determination was shown on the part 
of railroads throughout the country to increase their rates. 
The proposed increase in the freight rates amounted to from 10 
to 50 per cent over the old rates. Some of the Eastern lines 
advanced their passenger rates 12 per cent. 

The reason and necessity of the increase in rates were to be 
found, it was claimed by the roads, in the increase in wages to 
employees, in cost of materials, and in taxation, all of which 
demanded a readjustment of rates. 

Earnest protests were made by the shippers throughout the 
country against these arbitrary advances in rates. It was 
contended that the earnings of the roads had never been so great 
as at the moment of the proposed rate increase, that the divi- 
dends paid by the roads were exorbitant, that overcapitalization 
existed among the roads, and that, on this account, excessive 
charges were needed in order that returns might be paid on the 
watered stock. 

The increase of rates by the railroads was prevented by the 
Interstate Commerce Commission. In 1914, however, when 
application was again made by the railroads to the Commission 
for a 5 per cent increase in freight rates, the increase was 
granted (July 29, 19 14) to railroads in the western portion of 
the Ofhcial Classification territory, and later (Oct. 18, 1914) 
extended to all the territory. The increase affected all-rail 
freight, except coal, coke, and iron ore. The principal reasons 
for the granting of the increase were the effect of the European 
war on railroad business, the reduced revenues of the railroads, 
and the increased cost of materials. 

Remedies. — The remedies actually employed in the United 
States include actions at law and the activities of state and 
national commissions. 

I. Action at Law. — Againlt the evils we have mentioned, 
there existed always the remedy in law for the shippers. They 
could bring their cases into court. But the remedy was slow 



296 REMEDIES FOR RAILROAD EVILS 

and costly. It was difficult for small dealers to contend against 
the array of legal talent and wealth possessed by the powerful 
railroads. 

2. State Commissions. — Most of the states have recognized 
the need of a remedy, and have appointed state commissions 
to examine complaints brought by shippers against the rail- 
roads. The legality of these commissions has been upheld by 
the courts. 

State commissions have done little in the way of remedying 
the evils complained of. They have done something, but their 
action is necessarily circumscribed. They can regulate traffic 
only within the limits of their own states. And very often 
there existed no uniformity between the regulations of adjoin- 
ing states, or even in the views of railroad evils held by different 
states. In some states {e.g. California) rebates were not 
unlawful. 

3. Interstate Commerce Commission. — The Interstate Com- 
merce Commission was established in 1887. The general pro- 
visions of the law instituting the commission were that the 
commission should (i) see that the rates were just and reason- 
able ; (2) prevent pooling, in order to encourage competition ; 
(3) see that rates were fixed according to the long-and-short-haul 
principle. 

The commission was composed of five (later seven) commis- 
sioners appointed by the President. It was not a judicial court. 
Its office was merely to consider the facts as presented in any 
case of complaint brought by shippers against the railroads. 
Appeal could be taken from its decisions by the railroads to the 
courts. The commission had not the power to fix any particular 
rate. It could, however, declare any particular rate illegal. 

The commission proved inefficient. It lacked the power to 
enforce its decisions and to correct abuses. Several acts were 
passed by Congress to increase the power of the commission. 

The Elkins Act (February 19, 1903) made rebates and dis- 
criminations misdemeanors punishable by a fine of not less than 
$1000 and not more than $20,000. 



INTERSTATE COMMERCE COMMISSION 297 

The Hepburn Act (June 29, 1906) gave a broader definition to 
the words " railroads " and " transportation," so as to include 
within the jurisdiction of the commission the regulation of pri- 
vate cars and terminal charges. Power to establish a rate or 
to declare what will be a proper charge in any special instance 
was conferred on the commission, but only in cases where com- 
plaint was made. The commission could not take the initiative 
in rate making. A penalty of imprisonment of not more than 
two years was added to the penalties contained in the Elkins Act. 
The commission was to consist of seven members instead of five. 

The act contained an important clause, the '' commodities '* 
clause, which forbade railroad corporations from continuing the 
ownership of the sources of the commodities which they trans- 
ported over their lines. The object of the provision was to pre- 
vent the railroad managers from having undue advantage, as 
owners and carriers, over other business concerns, which were 
only owners of commodities and had to depend on the railroads 
as carriers of their product. This clause took effect May i, 
1908. (Cf. Journal of Polit. Econ., April, 1908, p. 235.) 

The Mann-Elkins law (June 18, 19 10) was a further effort 
to give more efficiency to the Interstate Commerce Commission. 
The jurisdiction of the commission was extended to telegraph 
and telephone lines; the long-and-short-haul principle was made 
effective; the commission was empowered to investigate and pass 
upon any infraction of the law by a railroad without waiting for 
a complaint of the aggrieved party, and to suspend for a consid- 
erable period any proposed increase of rates, while the proof of 
the reasonableness of the proposed increase was put on the rail- 
roads. 

After the declaration of war against Germany and Austria 
(April 6, December 7, 191 7), the President, by proclamation 
dated December 26, 19 17, assumed possession and control of 
nearly all systems of transportation in the United States. To 
carry out the provisions of the proclamation, the Federal Control 
Act was passed March 21, 19 18. The operation of the railroad 
systems was taken over by the United States Railroad Admin- 



298 REMEDIES FOR RAILROAD EVILS 

istration. It was admittedly an emergency measure, made im- 
perative by the exigencies of the war. Such unity of control 
was necessary to facilitate the transportation of troops, war 
material, and equipment. 

The Esch-Cummins law, known as the Transportation Act, 
passed Feb. 28, 1920, restored the railroads to private owner- 
ship, and sought by legislative measures to reestablish the credit 
of the roads, help them finance their requirements for extensions 
and betterments, and furnish a more effective medium of rail- 
road regulation. 

The membership of the Interstate Commerce Commission was 
increased to eleven members. The commission was given a 
greater measure of authority and responsibility in relation to 
railroad regulation and the settlement of the numerous railroad 
difficulties. It was authorized to determine as nearly as pos- 
sible the aggregate value of all railway property used in trans- 
portation, with a view to fixing the passenger and freight rates 
of the roads. The railroads were guaranteed, for a period of two 
years after the passage of the act, a return equal to 6% of the 
aggregate value of the railroad property. After the two-year 
period, the commission was so to fix the rates that a reasonable 
return (6%) would be assured to the roads. All that was gained 
above the reasonable return was to become the property of the 
government to be used as a reserve fund and dispensed in further- 
ance of the public interest in railway transportation either in 
purchase, lease, or rental of transportation equipment and 
facilities, or in loans to the carriers. A nucleus for this 
fund was immediately created by the appropriation of $300,- 
000,000. 

For the settlement of labor disputes, the commission was 
given power to appoint Railway Adjustment Boards upon ap- 
plication of parties in dispute, and, for final adjudication of dis- 
puted questions, there was estabhshed a Railway Board of 
Labor Appeals composed of nine members, three of whom were 
representatives of labor, three, of the railroad employers, and 
three, of the public. 



ARGUMENTS FOR GOVERNMENT OWNERSHIP 299 

II. Government Ownership of Railroads 

The inadequacy of government regulation of railroads, as mani- 
fested hitherto in both state and federal legislative measures, has 
led to the conclusion in the minds of many, that the only solution 
of the difficulty lies in government ownership of all the railroad 
systems. The Post-Office system is in the hands of the govern- 
ment, and is administered with practically general satisfaction. 
The fact of a deficit annually occurring in the Postal department 
in years past has been habitually quoted, but the possibility of 
curtaihng expenses in the department has been shown in recent 
years, and further improvements in administration have shown 
that the system may become self-supporting. 

As the government owns and controls the mail system of the 
country, so, also, in the opinion of some, should it have the 
ownership and the control of the railroads. 

Arguments ^or Government Ownership. — The reasons ad- 
vanced in support of this opinion may be summarized as fol- 
lows : — 

1. To the state belongs the duty of providing not only for the 
public peace and the integrity of the laws of the country, but 
also for whatever may conduce to the common civil prosperity 
of the citizens. Now, transportation under conditions of free- 
dom from excessive charges, discriminations, favoritism, and 
all the evils of the present system is surely conducive to such 
prosperity. Hence the desirability of government ownership. 

2. The railroads should be considered public concerns rather 
than private concerns. They serve a public utility and need 
rather than a private. They have been largely subsidized by 
the government and are engaged. in commerce that pertains to 
the vital welfare of the whole country. Hence the railroads 
should be owned and controlled by the government. 

3. This fact is all the more emphasized in time of war, when 
the railroads become an essential means of offense and defense 
for the country. 

4. The railroads under government ownership would cease to 



300 



GOVERNMENT OWNERSHIP OF RAILROADS 



be private concerns, and the difficulty of bringing about accord 
between their present dual characters as at once private and 
pubUc concerns would be obviated. 

5. The power of railroad managers for working evil and for 
showing favoritism to persons and localities would cease. 

6. Uniform classification could be established over the whole 
country. 

7. Discriminations and rebates would come to an end. 

8. The immense revenues accruing from railway service, 
that now swell the fortunes of directors and stockholders, would 
revert to the public treasury and help to diminish the general 
burden of taxation. 

9. Considerable sums of money would be saved through the 
abolition of an army of high-salaried officials, advertising 
methods, soliciting agents, and lobbyists. 

These are some of the reasons that lead many to advocate 
government ownership of railroads. 

Railroads in Foreign Countries. — The action of foreign gov- 
ernments in this matter has also had an influence in encouraging 
the idea. Nearly all foreign countries own their railway systems, 
many both own and manage them, and it is thought that what 
obtains satisfactorily in other lands might well be adopted in 
our own. 

A brief review of the status of railroads in foreign countries 
will be of interest, and may the better enable us to form our 
opinion on the subject of government ownership and govern- 
ment management. The various combinations are as follows : — 

1. Government ownership and government manage- 

ment Belgium. 

2. Government ownership and private management . Italy until recently. 

3. Private ownership and government management . Part of x\ustria. 

4. Mixed government and private ownership and 

management France. 

France. — The railway system of France is composed of six 
large divisions. There is one state line. The government 
contributed part of the capital to build the roads. After a 



RAILROADS IN FOREIGN COUNTRIES 301 

certain number of years (ninety-nine) the entire railway prop- 
erty reverts to the state. The government exercises strict con- 
trol and supervision. In the construction of the roads, there 
was little waste of capital. Competition was suppressed. 
Freight rates are not excessive, and passenger rates are very 
low. The government guarantees the interest and the dividends 
on railroad bonds. 

Belgium. — Government ownership is here best illustrated. 
Railway construction was begun in 1833 by the state. Private 
lines were also built. Competition set in, and proved to be 
uneconomic and wasteful. In 1870, the government began to 
buy up the private lines. Now the government owns and 
operates practically the entire railroad system of the country. 

Italy. — Before 1868, there existed disconnected lines in each 
province. Competition and its evil results were rampant. 
After 1868, the lines were united. There were four great 
systems — Upper Italy, Rome, East Coast, Sicily and the 
South. There was Httle competition, and combinations were 
easily made. 

After 1868, the government began to buy up the railroads. 
In 1875, the railroads in great part were owned and operated by 
the government. Government control proved unsuccessful. 
In 1885, the government, still owning the roads, gave up the 
operation to private companies. The service proved unsatis- 
factory and, since 1905, efforts have been made leading to state 
operation of the railways. 

Germany. — State lines were built, 1 848-1 850, in Prussia. 
Private lines were also built. Competition was keen, the serv- 
ice poor, and the rates high. 

In 1 86 1, Bismarck came into power, and militarism ruled the 
country. In 1871 . and thereafter, the railroads underwent 
a unifying process. In 1878, 3000 miles of railroad were owned 
and operated by the state; 2000 were owned by private com- 
panies and operated by the state ; 6000 were owned and operated 
by private corporations. In 1881 , 7000 were owned and operated 
by the government; 3000 by private companies. In 1885, 



302 



GOVERNMENT OWNERSHIP OF RAILROADS 



13,000 were owned and operated by the government in Prussia 
alone, 1000 by private companies. In 1900, there were 30,597- 
miles of railroad in the German Empire, and 93 per cent were 
owned and operated by the state. 

A Code of Railway Regulations was issued by the government 
in 1886. Since 1875, there has been no competition. Pooling 
is allowed between railroads, canals, and waterways, in order to 
ehminate wasteful competition and unjust discriminations. 

Austria- Hungary. — In 1906, 68 per cent of the total miles 
of railroad in Austria were operated by the state, and over 
39 per cent were owned and operated by the state. In 1908 
only 17 per cent of the total miles of railroad in Hungary were 
under private management. The state owned and operated 
44 per cent, and operated the 39 per cent that remained under 
private ownership. In both countries all railroads, whether 
private or government-owned, are subject to the direct super- 
vision and control of the ministry. 

Russia. — The government owns and operates most of the 
railroads in European Russia. Private lines, before the war, 
were subsidized and thus controlled by the state. 

Norway. — Since 1901 the railroads are owned and operated 
by the state. 

Sweden. — In 1901 there were 7217 miles of railroad, 2392 
miles of which were owned and operated by the state. Com- 
petition is prohibited. 

Spain and Portugal. — There are private lines helped by the 
state. 

Switzerland. — In 1897 a law was passed authorizing the pur- 
chase of all the railroads of the country. In 1909 the gov- 
ernment owned and operated 65 per cent of the railroad mileage. 

India has four classes of railroads : — 

1. State-owned lines operated by companies. 

2. State-owned lines operated by the state. 

3. Lines constructed by guaranteed companies. 

4. Lines constructed by assisted companies. 



MOTIVES FOR GOVERNMENT OWNERSHIP 303 

Mexico y Australia (since i860), Japan (since 1906), have 
government ownership, 

England, Hke the United States, has private ownership. 
(Cf. Logan G. McPherson, Transportation in Europe.) 

Motives for Government Ownership in Foreign Countries. — 
The example of foreign countries, as was said before, encourages 
many in this country to agitate government ownership of rail- 
roads, as the only means of doing away with the present evils. 
It must be borne in mind, however, that foreign states have had 
other motives for acquiring possession of their railroads besides 
that of avoiding the abuses of railroads. 

The state of uneasiness in which the nations of Europe exist 
through the fear of foreign invasion has led them to hold pos- 
session of a means that would prove of immense service to them 
in case of war. The power to mass troops along some threatened 
portion of .the frontier at a moment's notice, to hasten reen- 
forcements to any point in case of actual conflict, to furnish 
constant connection with bases of supplies which could be kept 
at safe distances from the invaders, to hurl masses of invading 
troops against the frontiers of an enemy, — this power appeals 
to nations situated so closely together within the confines of 
Europe, and leads them to adopt government ownership of the 
railroads. 

Again, when the railroads in most foreign countries were 
started and had passed beyond the experimental stage, there 
was lacking the private enterprise necessary to carry out any 
elaborate system of construction. The various governments 
had to subsidize the roads, to contribute all or much of the capital 
needed to establish the lines. The policy of government owner- 
ship was thus forced upon the nations, and the policy once 
adopted became in most cases the accepted practice. 

The avoidance, through government ownership, of the evils 
attendant on private ownership was a very subordinate con- 
sideration in foreign countries. The two preceding motives 
were predominant. 
, With the United States, the last motive would be the only one 



304 GOVERNMENT OWNERSHIP OF RAILROADS 

that would have weight. Remotely situated as the United 
States is from foreign countries, there does not exist the same 
need of watchful guard over the frontiers as among the closely 
grouped countries of Europe. 

Nor was there lacking sufficient capital from private sources 
to build the many miles of roads that now traverse the country. 
And were new roads needed to-day, there is no doubt that 
ample funds could be obtained without any appeal to govern- 
ment aid. 

The motives, therefore, that influenced the foreign nations 
in the adoption of a government-ownership policy do not hold 
in the United States. (Cf. A. T. Hadley, Railroad Transpor- 
tation, p. 238.) 

Objections to Government Ownership. — On the other hand, 
the following may be given briefly as the objections to govern- 
ment ownership of railroads : — , 

1. The argument that to the state belongs the duty of owning 
the railroads because they are essential to the common civil 
prosperity of the citizens, is not conclusive. The state is not 
obliged to seek the common welfare of the citizens directly by 
actual personal administration of all the means conducive to 
the civic welfare. It amply fulfills its duty when it leaves the 
transportation problem in the hands of private citizens, encourag- 
ing them in their efforts and aiding them when necessary, solely 
reserving to itself the right of supervision and regulation in 
order to eliminate the abuses that may threaten the rights of the 
community. 

2. Under government ownership inefficiency would replace 
the present remarkable degree of efficient management that is 
to be found among railroad officials. Many of the managers 
of the roads are men who have risen from the ranks, and have 
owed their promotion to the proof they have given of the pos- 
session of exceptional executive ability. These men would be 
replaced by others, who could not possess the same knowledge 
of details and the same practical ability. 

Inefficient management would entail economic loss, and the 



OBJECTIONS TO GOVERNMENT OWNERSHIP 305 

large returns at present earned . by the railroads would cease, 
to the great injury of the public. 

3. The returns from the railroads are subject to constant 
variation. The government could not rely on any certain income 
from the roads. The amount would vary at times ten or even 
one hundred millions of dollars. Failures of railroads would 
happen under government ownership as well as under private 
ownership. In the thirty years elapsing between 1876 and 1906, 
676 roads were placed under receivership and 925 roads were 
sold under foreclosure. The total amount of stocks and bonds 
involved in both cases was over $13,562,000,000. The credit 
of the country would suffer were it to assume the responsibility 
and risk of conducting the railroad business on a paying basis. 

4. The tariff changes have great influence on business through- 
out the country, causing hesitancy on the part of merchants 
to engage in extensive commercial transactions. In like man- 
ner, if the legislature could control railroads and their rates and 
change managers at its pleasure, great disorder w^ould result in 
business. Stability and permanence of business conditions are 
essential to commercial prosperity. ~> 

5. There would be the danger of sectio^ial favoritism. If 
railroad managers can to-day discriminate by classifications 
and rates against sections of the country, there is no reason why, 
under government ownership of railroads, a party in control of 
the government could not favor one section of country more 
than another, when there was opportunity of thereby gaining 
political support or of rewarding party adherence. 

6. Government ownership of railroads would destroy personal 
initiative. The causes of the great advance of railroads in 
this country in the past have been the personal enthusiasm of 
managers, the desire of each management to surpass every other 
in better accommodations, in more perfect equipment, in greater 
value of railroad property. Much of all this would cease, were 
the government to possess and operate the roads. 

7. Government ownership marks a tendency towards social- 
ism and communism. 

POL. ECON. — 20 



3o6 GOVERNMENT OWNERSHIP OF RAILROADS 

QUESTIONS 

1 . What are the evils of railroads ? 

2. Mention the remedies that exist against the evils of railroads. 

3. Why are lawsuits and state commissions inefficient in this matter? 

4. When was the Interstate Commerce Commission established? What is 

the purpose of the commission? Mention the laws that have given 
greater efficiency to the commission. 

5. \Vhat are the reasons advanced for the adoption of government owner- 

ship of railroads ? 

6. What is the condition of railroads in foreign countries ? 

7. What were the motives for government ownership of railroads in foreign 

countries ? 

8. Give the main objections to government ownership of railroads. 



CHAPTER XVII 

CORPORATIONS. TRUSTS 

I. Corporations 

The tendency in business to-day is towards corporate 
organization. This tendency has become marked since 1887. 
Before that time, a few hundred millions of dollars represented 
the total capitalization of all industrial corporations. During 
the succeeding twenty years the capitalization of corporations 
represented by their securities reached the enormous sum of 
over twenty-five billions of dollars. (Cf. H. L. Wilgus, A 
Study of the United States Steel Corporation in its Individual 
and Legal Aspects.) 

Methods of doing Business. — Industrial business is carried 
on to-day in the following ways : by individual enterprises ; 
by firms of partners, or partnerships; by corporations; by 
trusts. 

The report of the Census of 19 10 shows the conditions of in- 
dustrial enterprise. In that report it is shown that there were, 
in 1909, 268,491 manufacturing establishments. Of these, 140,- 
605 were operated as individual plants ; 54,265, as partnerships ; 
and 69,501, as corporations. There were, besides, 4120 coop- 
erative or miscellaneous concerns. 

The largest amount of the total product was turned out by 
the corporations. Thus, the value of the products of the cor- 
porations was $16,341,000,000; that of partnerships, $2,184,- 
000,000; that of individual plants, $2,042,000,000. The co- 
operative and miscellaneous concerns produced to the value of 
$104,000,000. 

307 



3o8 



CORPORATIONS 



Establishment 


Number 


Average No. 
Wage Earners 


Product-value 


Individual 

Firm 

Corporation 

Other 


140,605 

54,265 

69,501 

4,120 


804,883 

794,836 

5,002,393 

12,934 


$2,042,000,000 

2,184,000,000 

16,341,000,000 

104,000,000 



(Department Commerce and Labor. Bulletin, 1910. Manufactures, 
U. S. Cf. Leroy-Beaulieu, The United States in the Twentieth Century, 
Part III, ch. 3.) 



1. Individual Establishment. — In individual establishments 
the individual supplies the capital, and his property is liable 
for the debts of the concern. 

2. Partnership. — A partnership is the association of two or 
more persons in one business. Each partner contributes some- 
thing of value to the business in the form of money, labor, or skill, 
and is entitled to a part of the profits. Unlimited liability is 
assumed by the partners for all the debts of the business, and 
the acts of one partner bind all the copartners. The laws of 
many states provide for a limited partnership, in which a person 
contributes a certain amount of funds to the concern and is 
liable for its debts only to the amount of the funds contributed. 
Such persons are silent partners and take no active part in the 
management. A partnership is dissolved by agreement or by 
the withdrawal of one of the partners. 

3. Corporation. — An industrial corporation usually takes the 
form of a joint-stock corporation. An industrial joint-stock 
corporation is an association of many persons, who, by buying 
shares, contribute their capital for some commercial enterprise, 
and receive a part of the profits of the enterprise in proportion 
to the number of shares they hold. The sums contributed by 
the organizers constitute the capital of the corporation. The 
shares have a fixed value, most frequently $100 a share, but they 
may be rated at any amount. The contributors of the capital 
become the shareholders or stockholders of the corporation. 



METHODS OF DOING BUSINESS 309 

Stocks are of two kinds : Preferred stock and Common stock. 
The stockholders are entitled to receive interest on the amount of 
capital they have invested. Interest is paid in the form of 
dividends. Dividends are first paid on the preferred stock and 
then if possible on the common stock. The dividends represent 
the profits of the business. 

Preferred stock is Cumulative or Noncumulative : cumu- 
lative when the dividends, if not paid at all or in full at the time 
appointed, must be paid in full at some later declaration of 
dividends before any dividends are paid on the common stock ; 
noncumulative when there is no such obligation to apply future 
earnings to pay back dividends not earned at the time. 

A board of directors is chosen from among and by the stock- 
holders of the corporation, each share representing one vote. 
From among the directors an executive board is chosen and 
officers appointed, and these become the active managers of the 
business. The stockholders assembled in general meeting super- 
vise the actions and methods of the board and the officers. 

The Corporation Charter. — At first, corporations were 
created by special charters issued by the legislative bodies of 
the several states. To-day each state has its corporation laws, 
which regulate the method of organization, and under these 
general laws corporations may be organized. Some of these 
laws apply particularly to certain kinds of corporations, such 
as banks, insurance companies, and railroads. A charter is 
secured under the laws of the state. The charter runs for a cer- 
tain number of years and may be reissued. 

4. Trust. — If several corporations, doing most of the busi- 
ness in some industry, combine under the control of a single 
board, the combination is called a trust, no matter what the 
form of organization may be. In most cases the trust is in form 
a large corporation ; so that trusts have all the advantages and 
disadvantages of corporations in general, besides some special 
characteristics which are discussed in the last part of this chapter. 

Advantages of Corporations. — Corporations have advantages 
not found in other kinds of organizations. They permit the 



31 CORPORATIONS 

aggregation of a large amount of capital, and allow the undertak- 
ing of extensive operations not possible to smaller capital. They 
have a perpetual existence and are not dissolved by the retire- 
ment of individual stockholders. They possess many means of 
economizing and, by reducing the cost of production, can sell 
their product to the consumers at lower prices. They are able 
by paying large salaries to secure the most skilled managers and 
raise the standard of business efficiency. They permit even the 
smallest investors to partake in large extensive undertakings. 
Each stockholder assumes only a limited liability, determined 
by the number of shares he holds. The shareholder may retire 
from the enterprise at any time by the sale of his shares. The 
shareholder is usually able to know exactly the amount of risk 
he assumes upon buying shares in the company. 

Objections to Corporations. — Notwithstanding the advan- 
tages corporations possess, the method of conducting corporate 
business to-day has given rise to much popular criticism. The 
objections most commonly brought against corporations may be 
summed up as follows : — 

I. Corporations frequently come under the influence of one 
man or a clique of men who have secured possession or control 
of the major part of the stock. '' Dummy " directors are set 
up by the financial interests that control the corporation, and 
such directors are wholly in the hands of the powers that have 
appointed them. The business is frequently run, not with the 
purpose of benefiting the shareholders, but to subserve some 
personal interest of those in control. Again, the directors are 
^able, through their knowledge of the intimate affairs of their 
corporation, to deal in the buying and selling of shares for their 
own benefit, or they may, through the command they have 
of the large funds of the concern, make use of them for their 
own monetary advantage. Still another questionable means 
within the power of directors is to lease various functions of 
the company for a nominal consideration to tributary com- 
panies, in which the directors are financially interested. 
Recent governmental investigations of corporations in differ- 



OBJECTIONS TO CORPORATIONS 31 1 

ent parts of the country will furnish plentiful examples of all 
these abuses. 

2. The limitation of risk on the part of the directors promotes 
negligence and frequently dishonesty in commercial trans- 
actions. An individual or a partner of a firm, upon whom the 
whole financial responsibility in business ventures falls, will 
naturally be more careful in the conduct of business than one 
who bears but a proportionately small share of the loss attendant 
on failure or exposure. 

3. Little sympathy can exist between the shareholders of a 
corporation and the employees. The shareholders are concerned 
only about the payment of their dividends. The managers are 
but the agents of the stockholders, and their main purpose 
is to please those who have placed them in office by increasing 
the dividends. This is done frequently by reducing cost of 
production through a decrease in the wages of the laborers. 
The cases were exceptional in the past, where corporations con- 
sidered their employees otherwise than as mere machines, and 
where they studied the welfare of their laborers, except when 
forced to do so by legislative measures. " Soulless " corporations 
is a term well applied to many of the large business interests. 
(Cf. J. A. Hobson, The Evohition of Modern Capitalism, ch. VI.) 
A more equitable spirit, however, has been manifested in the last 
decade. There is a tendency to help the employees even beyond 
the legal requirements. In some large concerns various kinds 
of accommodations have been provided for the working men and 
v/omen, pension funds have been instituted, and profit sharing 
has been introduced. 

4. Corporations are sometimes formed for the purpose of 
fleecing credulous investors. A franchise which costs little or 
nothing is secured to carry on some business enterprise. A pro- 
moter goes about seeking for investors. Specious arguments 
are used by word of mouth or through elaborate advertise- 
ments, and there are always found vast numbers who are anxious 
to throw away money in foolish investments. Shares are bought 
by the unwary at a low opening price upon the assurance that 



312 CORPORATIONS 

their value will rise in a short while. A great amount of capital 
is collected. The promoters receive their commission and retire 
from the concern. The corporation oiEhcials disappear with the 
funds collected, or transfer the business to some other concern, 
and the shareholders are left with worthless certificates in their 
hands, representing values in a corporation that existed only 
on paper. 

5. Overcapitalization is often resorted to by corporations. 
" Stock watering " is the term commonly employed. It has 
been stated by bankers that most of the large industrial cor- 
porations " water " their stock, and give a wholly fictitious 
value figure to their advertised capital. It has been asserted 
on the floor of Congress that the capital of the railroads is half 
water. 

The figure given as the capital of a company should naturally 
represent real value. If $500,000 is given as the capital, that 
$500,000 should represent the actual amount of money sub- 
scribed and paid in by the stockholders. Putting the par 
value of the shares at $100 a share, there should be 5000 shares 
distributed among the investors. The shareholders have actually 
given to the company $100 for each of the shares they hold. 
This capital will be expended, of course, as all capital is, in buying 
the plant, machinery, raw material, and in paying the current 
expenses of the business. The $500,000 represents the amount 
of money invested. If the business should bring in a net profit 
of, say, $50,000 a year, there would be a dividend of 10 p^ cent 
for the shareholders. Each shareholder should receive $10 
for every share he holds. But if, while the actual capital is 
$500,000, the nominal capital given out is $1,000,000, the net 
profit of $50,000 would represent a dividend of only 5 per cent 
for the investing shareholders. The 5000 shares sold to investors 
would absorb $25,000 of the net profit. The other $25,000 of 
profit would pay dividends on stock given away to the promoters 
of the company. 

Evidently the capital can be watered to such a figure that the 
net profit of the business will yield very small dividends to the 



OBJECTIONS TO CORPORATIONS 313 

shareholders. Corporations do not care to have their dividends 
appear too large. Large dividends, representing as they do 
large profits, make the consumer and the wage earner wonder 
why some greater part of the large profits of the business should 
not find their way to them, in the shape of reduced prices of 
products and higher wages respectively. 

That overcapitalization is injurious to the consumer will be 
apparent from the following example: — 

A gas company may have a capital of $500,000. 
5 per cent interest on the capital = $25,000 
Operating expenses = 25,000 

$50,000 
There are 50,000 units for sale. 
To cover operating expenses and gain 5 per cent interest, the 50,000 units 
must sell for $50,000, i.e. $1 a unit. 

Hence, gas will be sold at $1 a thousand cubic feet. 
Now, if the capital is nominally increased to $1,000,000 
5 per cent interest on the capital = $50,000 
Operating expenses = 25,000 

$75,000 
There are 50,000 units for sale. 
To cover the operating expenses and gain 5 per cent interest, the 50,000 
imits must sell for $75,000, i.e. $1.50 a unit. 

Hence, gas will be sold at $1.50 a thousand cubic feet. 

There are many who hold that raising the figure of the capital 
beyond the actual amount of capital contributed is often justi- 
fiable and should not be characterized as stock watering. Cer- 
tain immaterial things should be included in the actual value of 
a corporation. Thus, there are the earning power of the cor- 
poration, the value of the franchise, the good will, the monopoly 
control of a commodity or a service, the selling value of the securi- 
ties which may be far above the par value. All these things, it 
is claimed, entitle a corporation to fix its capital figure in excess 
of the amount justified by mere tangible property. 

6. Corporations have a tendency to drive small individual 
enterprises out of business. It is impossible in many kinds of 
business for a small firm to compete with a corporation. The 



314 



•TRUSTS 



latter is able, because of the large capital at its command, to 
introduce high-priced machinery which would be beyond the 
means of smaller capital. The product turned out by the large 
company can be sold at a lower price than that of the smaller, 
because of the many economies possible to large-scale industry. 
The large industry, being able to secure a wide market, adopts 
the principle that there is more profit in many sales at a low price 
than in fewer sales at a high price. The smaller industry, not 
possessing the advantages of the larger, cannot reduce its prices, 
and the high-priced product of the smaller industry is driven 
from the market. Hence, many manufacturers who formerly 
conducted their own business have to-day become the paid em- 
ployees of the large corporations. The tendency to concentra- 
tion, however, is not felt in all industries. Certain industries, 
such as the iron and steel, agricultural machinery, electrical 
apparatus, cotton, glass, leather, food products, liquor, and ship- 
building industries, have come under the control of concentrated 
capital. (Cf. Leroy-Beaulieu, The United States in the Twen- 
tieth Century, Part III, ch. 2.) 

11. Trusts 

Definition and Explanation. — The trust is a form of con- 
centration that has arisen in recent times. It is a combination 
of several corporations under one management. The securities 
of the corporations are bought up and the holders of such 
securities receive trust certificates in exchange. A promoter 
puts before two or more large corporations the advantages to 
be gained by combination. The corporations combine and are 
duly incorporated under the laws of a state. The charter having 
been obtained, the business of the trust may be transacted in 
any state of the Union. 

Trusts have increased greatly in number during the past 
twenty years. In 1900 there were 185 trusts, embracing over 
2000 distinct plants. In 1904 the number of trusts was over 
790, not including railroads. The largest is probably the United 



MOTIVES FOR THE FORMATION OF TRUSTS 315 

vStates Steel Corporation, organized in 1901, and combining ten 
large corporations, with a capitalization of over 1400 millions ot 
dollars. The number of trusts has increased considerably in 
more recent years. 

Trusts exist in Europe, but they have little resemblance to 
the trusts in the United States. In Germany, for example, 
each firm that enters a trust combination retains to a large 
extent its own autonomy. (Cf. Staats Lexicon, " Kartelle.") 
Competition is not destroyed. One of the important objects 
of the trust is to regulate the output of the industries, so as to 
prevent overproduction. 

Motives for the Formation of Trusts. — In the United States, 
the primary motive that brings about the formation of a trust 
is undoubtedly the desire to eliminate competition. Competi- 
tion amounts to a warfare between different estabhshments. 
It entails immense waste and expense. To eliminate it various 
means have been employed. Pools were formed, in which a 
common fund was established by several corporations. All 
the earnings of the corporations were turned into the common 
fund, and at the expiration of stated periods a distribution was 
made upon terms adopted by the members of the pool. Again, 
agreements were executed by which exclusive territory was 
apportioned to the different concerns, or by which a fixed scale 
of prices was to be maintained. Finally, " holding companies " 
were organized that bought up the majority of the stock in 
competing concerns and thus prevented competition. All these 
methods having been declared illegal, recourse was had to the 
trust. (Cf. G. H. Montague, Trusts of To-day.) 

A trust that embraces a number of large corporations effec- 
tively aboUshes competition between them. If the combination 
secures a monopoly of the industry, as through the absorption of 
the sources of simply or the acquisition of patent rights, it be- 
comes complete master of the industry. In cases where a mo- 
nopoly is not possible, the means adopted to destroy the compe- 
tition of others in the industry are frequently unscrupulous. 
The trust seeks to absorb all its competitors, whether individual 



3i6 TRUSTS 

firms or incorporated companies. It buys them up when possi- 
ble, and the price paid is determined not so much by the value 
of the business bought, as by the cost the trust would be put to 
in order to destroy the opponent by competition. A powerful 
rival that could wage a protracted war against the trust will 
command a high price. (Cf. J. A. Hobson, The Evolution oj 
Modern Capitalism, ch. VI, p. 144.) If the opponent refuses 
to sell out to the trust, a merciless warfare is waged against it. 
The almost unlimited means at its control gives the trust im- 
mense power. By underselling and by agreements with trans- 
portation companies, it can ultimately force the opponents to 
submit, when the only alternative for them is to go out of 
business. 

A second motive for trust combination is the power to control 
the price of the commodity produced. A trust may arbitrarily 
fix the price of its product if it secures a monopoly of the business. 
In any case, if a trust can gain control of the major part of the 
supply of a product, it can in great measure determine the amount 
of the supply, and thus manipulate to its own advantage that 
fundamental law of supply and demand which regulates the 
prices of commodities. Where a trust combines several cor- 
porations, it controls the output of them all. It can close 
down the major part of the plants, or can decide the amount 
of product each may produce. A trust may thus control the 
supply and so control the price of the product. (Cf. J. A. 
Hobson, The Evolution of Modern Capitalism, ch. VI, p. 3.) 

A third motive that prompts the formation of trusts is the 
economy that results from large-scale business. Economy will 
result from a number of sources, such as the reduction of office 
rent and of salaries, the curtailing of the great army of travel- 
ing agents, the cheaper buying of raw material because bought 
in large quantities, the construction by the trust of its own trans- 
portation lines on land and on water, the acquisition of the 
sources of supply, the withdrawal of competition altogether when 
a monopoly is secured through combination and the lessening of 
the expense of competition when there is no monopoly, the saving 



THE TRUST PROBLEM 31 7 

of transportation charges through ability to ship goods from 
points near the destination, the power to use waste and to turn 
out by-products, the lessening of expensive advertising, the 
saving of wages when several of the smaller concerns are closed 
altogether or operated on part time. 

This power of economizing is the great economic benefit con- 
ferred by trusts on modern industrial methods. It has brought 
about a greater efficiency of production. That the trusts are 
popularly condemned in spite of the widespread economies they 
have introduced, is due to the fact that many will be injured 
through the operation of these economical methods. Smaller 
estabhshments find difficulty in continuing alongside of the great 
trusts, individuals are driven out of business, many traveling 
salesmen lose their occupation, labor is aifected by the cessation 
of operations in many plants and the reduction of operations in 
others. Such evils, very real to those affected by them, might 
be regarded as the necessary results of industrial development. 
The introduction of machinery produced similar results in the 
past. A more just cause for popular condemnation of trusts 
exists in the fact that these economies are effected often by in- 
iquitous methods, and that the savings made by the trusts 
through their economies find their way into the pockets of the 
few and are not widely distributed among the members of society. 

The Trust Problem. — Corporate organizations that unite 
many men and vast sums of capital, in order to carry on large- 
scale productive industries, furnish one of the most serious 
problems of our times. The trusts that link together in one 
interest a great number of individual corporations, and that seek 
to absorb all the corporations and the smaller firms engaged in 
the same or related industries, have especially come to be re- 
garded as a menace to the welfare of society. The rapid growth 
of corporations and trusts within the past twenty-five years is 
viewed with apprehension by people and governments alike. 

That there are many evils in corporate organizations, affecting 
many classes of society, the consumers, the laborers, and the 
smaller industrial enterprises, cannot be denied. That they bring 



3i8 TRUSTS 

with them many advantages must also be admitted. Hence 
they have their adherents as well as their opponents. And, as 
happens in the case of all public questions, there are extremists 
on both sides. There are those who consider the trusts as un- 
mitigated evils, which must be destroyed. Corporations are 
blamed for all the present evils of society. The formation of a 
trust has been branded as a crime, and laws have been passed 
inflicting severe penalties on those who organize them. (Cf. 
G. H. Montague, Trusts of To-day, ch. V.) There are others 
who believe that corporations are but the result of economic 
development, bringing many advantages to society, and that 
they should be left free to develop to their utmost, untrammeled 
save by the laws that determine and control the march of all 
industrial advances. 

Finally, there are many who take a midway course with regard 
to these great corporations of industry, and, while holding that 
they should be allowed the widest scope for organization, yet 
insist on the need of a prudent but strong regulation by govern- 
mental authority. These combinations, they argue, are the out- 
growth of the industrial conditions of the present age; they 
have come to stay, and they will st.ay in one form or another, 
in spite of all efforts to destroy them. Moreover, it is pointed 
out, they add to the industrial efficiency of the nation and have 
it within their power to confer lasting economic advantages far 
beyond any contributed by smaller concerns under a system 
of unrestricted competition. 

Corporations are not in themselves an evil. The right of 
uniting with one's fellows for the purpose of attaining a common 
and lawful end by all just and legal means flows from the natural 
law. (Cf. Rerum Novarum.) The right to unite ceases to exist 
only when the end intended by an association or the means 
employed are opposed to the moral order, or when the existence 
of such association is opposed to the common good of the social 
body. When, therefore, a corporation or a trust is formed for 
perfectly legitimate ends and makes use of means that, on the 
one hand, oppose in no way the common social good, and that, 



REMEDIES FOR THE EVILS OF TRUSTS 319 

on the other hand, are capable of increasing the common welfare 
of society, the right of such corporation or trust to organize and 
to exist should not be interfered with. But if the corporation 
or trust is instituted for an iniquitous end or employs means 
opposed to the rights of others or such as are capable of destroy- 
ing the common welfare, the government, whose foremost duty 
is to protect society, must step in to prohibit such an organiza- 
tion or to regulate its methods. 

It will scarcely be denied that the large combinations as 
managed to-day need regulation because of the arbitrary methods 
employed and the menace they have become to industry. The 
question is what form that regulation shall take. 

Remedies for the Evils of Trusts. — (i) State Laws. — There 
already exist state laws passed by nearly all the states pro- 
hibiting monopoly, restraint of trade, the fixing of prices, the 
curtailing of output, and other practices. Some states forbid 
all kinds of combinations that have a restraining effect on trade, 
whether that restraint is reasonable or unreasonable. (Cf. 
G. H. Montague, Trusts of To-day, ch. V.) 

There is, however, great lack of uniformity in the laws of the 
several states ; there is, too, lack of uniformity in the attitude of 
the different states towards trusts. Some states seek to oppress 
them by stringent laws ; others invite them within their borders 
by the offer of legal facilities in regard to organization and 
regulation. Some states, like Delaware and West Virginia, have 
no antitrust laws. The federal Constitution allows interstate 
trading to any corporation legally established in one state. A 
corporation cannot be dissolved except by suit brought in the 
state under whose laws it has been incorporated and for acts in 
violation of the laws of that state. The consequence of all this 
is obvious. If one state finds it to its advantage to allow the 
easy organization of trusts, the stringent laws of all other states 
become of little avail. States may legislate only for intrastate 
trade, and the constitutionality of much of the state legislation 
affecting corporations chartered in other states has been in cer- 
tain cases called in question. (Cf. J. B. Dill, '' National Control 



320 



TRUSTS 



of Corporations," in Encyclopedia Americana ; G. H. Montague, 
Trusts of To-day, ch. V ; F. J. Stimson, The American Consti- 
tution, ch. YIII.) ^r ^' 

(2) Sherman Antitrust Law. — On July 2, 1890, Congress 
passed " an act to protect trade and commerce against unlawful 
restraints and monopolies." It is known as the Sherman Anti- 
trust Law. It declared illegal '' every contract, combination 
in the form of trust or otherwise, or conspiracy, in restraint of 
trade or commerce among the several states, or with foreign 
nations." It declared that 

" Every person who shall monopolize, or attempt to monopo- 
lize, or combine or conspire with any other person or persons, to 
monopolize any part of the trade or commerce among the several 
states, or with foreign nations, shall be deemed guilty of a mis- 
demeanor." 

The penalty for acts contrary to the law is a fine not exceed- 
ing $5000, or imprisonment not exceeding one year, or both. 
The word " person " or '' persons " used in the act " shall be 
deemed to include corporations and associations existing under 
or authorized by the laws of either the United States, . . . the 
laws of any state or the laws of any foreign country." 

Various objections were bronight against the act. The consti- 
tutionality of the law was called in question, but it was passed 
on and upheld by the United States Supreme Court in 1898. 
It was claimed that the act was too indefinite, that it related 
as much to individual business concerns as to trusts, that it left 
open to doubt the meaning of interstate commerce, that it pre- 
vented all kinds of combinations between manufacturers, since all 
combinations must be a restraint of trade, that it prevented 
combinations that were admittedly advantageous to industry, 
and, finally, that it left manufacturers at a loss to know what 
they could and what they could not do legally under the act. 

Through a recent (191 1) decision of the United States Supreme 
Court some light was thrown on the matter. The court decided 
that the act referred only to " unreasonable " restraint of trade. 
Combinations, therefore, against which unreasonable intent to 



REMEDIES FOR THE EVILS OF TRUSTS 321 

restrain trade could not be proved should not be molested under 
the law. 

Objections to the law even with the new interpretation are not 
wanting. It is declared that the interpretation of the court is 
new legislation (cf. Justice Harlan's dissenting opinion in the 
Tobacco Trust case, June, 191 1), that it unwarrantably lies 
wholly in the power of the judicial body to declare when " un- 
reasonable " restraint of trade is practiced or contemplated, that 
^' the final settlement of industrial questions is in the hands of 
judges who know very little about industrial questions, and who 
have no special preparation for dealing with them " (H. S. 
Smalley, " Trust Regulation and the Courts," in Journal of 
Political Economy, April, 191 2), that manufacturers are still at 
sea as to what may constitute unreasonable restraint. 

In spite of the objections against the law, its upholders declare 
that it furnishes an adequate weapon in the hands of the govern- 
ment to cope with the present evils. Efforts made to amend the 
act have had no result. In 1903, legislation strengthened the law 
by appropriating $500,000 for the purpose of enforcing its provi- 
sions, by giving to the Attorney- General the power to employ 
special counsel to conduct suits under the act, and by provid- 
ing for the appointment of special assistants to the Attorney- 
General and of an Assistant Attorney-General to aid in enforcing 
the law. During the years 1905-1911, nearly fifty prosecutions 
were instituted against trusts and combinations under the Sher- 
man law. Several large concerns, such as the Standard Oil 
Company, the American Tobacco Company, the Du Pont de 
Nemours Company (powder trust), and the Standard Sanitary 
Manufacturing Company (bathtub trust), were dissolved. 

(3) Clayton Trust Bill. — This bill became a law Oct. 15, 19 14. 
Its purpose is to supplement the Sherman law and other anti- 
trust measures. In general, the law denounces and makes un- 
lawful certain trade practices with the purpose of arresting the 
creation of trusts, conspiracies, and monopolies, such as dis- 
crimination in prices with intent to prevent competition ; ex- 
clusive and tying contracts ; holding companies, and interlocking 

POL. ECON. — 21 



322 



TRUSTS 



directorates. Illegal acts of corporations are to be deemed the 
acts of individual directors and officers of the corporations, who 
thus become subject to the penalties imposed. Labor and other 
associations are exempt from the operation of the antitrust laws. 

(4) Federal Control of Trusts. — The alleged inefficiency of 
antitrust laws has led to the suggestion of other remedies. The 
remedy most prominently suggested is federal control of all 
interstate commerce. That Congress has power under the 
Constitution to exercise such control is claimed in virtue of 
Clause 3, Section 8, Article I of the Constitution, which says : 
" The Congress shall have power to regulate commerce with 
foreign nations, and among the several states, and with the 
Indian tribes." (Cf. Hon. P. S. Grosscup, " The Government's 
Relation to Corporate Construction and Management," in 
Annals of the American Academy of Political and Social Science, 
July, 1908, p. 25.) 

Others hold, and they are sustained by a Supreme Court 
decision (a decision affecting the sugar trust), that this clause of 
the Constitution does not refer to manufacturing establishments. 
(Cf. F. J. Stimson, The American Constitution, ch. VIII.) An 
amendment to the Constitution would have to be passed, in 
order to bring the business of manufacturing concerns within the 
control of the federal government. Should that come about, 
all corporations of whatever kind doing an interstate business 
could be compelled to receive their charters from the federal 
government. They would thus be brought under the control 
and regulation of the government in regard to their organization 
and methods of conducting business, and become liable to a with- 
drawal of their charters in case of illegal practices. 

That adequate federal control of corporations can be secured 
under existing and possible legislation without the elaborate 
means of a constitutional amendment, is the opinion of many. 
And, indeed, the federal government has taken active means 
to arrive at a solution of the trust problem. In 1903, a Bureau 
of Corporations was established in connection with the Depart- 
ment of Commerce and Labor. The Bureau had power to 



REMEDIES FOR THE EVILS OF TRUSTS 



323 



investigate all industrial corporations engaged in interstate or 
foreign commerce, and to institute suits through the Attorney- 
General against violators of the law. Twelve years after its 
establishment the Bureau was superseded by the Federal Trade 
Commission. 

On Aug. 23, 191 2, Congress established a Commission on In- 
dustrial Relations consisting of nine members appointed by the 
President. The Commission was empowered to investigate 
the general condition of labor in the principal industries of the 
United States, especially in industries carried on in corporate 
forms, and to endeavor to find out the underlying causes of 
dissatisfaction in the industrial situation. The Commission 
presented to Congress a report of its findings on Aug. 23, 191 5, 
after which it expired. (See Report.) 

(5) Federal Trade Commission. — Another remedy long sug- 
gested against the evils often attendant on organized capital 
was the institution of a Trade Commission, with power to con- 
trol all interstate trading. Such a Commission was established 
by Congress on Sept. 26, 1914, and is known as the Federal 
Trade Commission. It consists of five members appointed by 
the President. In the act establishing the Commission, unfair 
methods of competition in commerce are declared unlawful, and 
the Commission is empowered to prevent persons, partnerships, 
or corporations (except banks and common carriers) from using 
unfair methods of competition in commerce. The Commission 
may investigate any industry where unfair methods are sus- 
pected or complained of, and upon finding the existence of such 
unfair methods may order the managers of the industry to cease 
such methods. If the order is not obeyed, the case is brought 
before the United States Circuit Court of Appeals, which there- 
upon assumes jurisdiction over the matter. The findings of the 
Commission, if supported by testimony, are conclusive. 

The Commission may impose severe penalties upon those 
who refuse to obey its summons, or to testify, or to produce 
documentary evidence when able. 

The Federal Trade Commission was enabled to take up its 



324 



TRUSTS 



duties on March i6, 191 5, when the first commissioners ap- 
pointed by the President took the oath of office. 

Whatever may be the results of the measures thus far taken, 
the trust problem still remains unsettled. Regulation, how- 
ever, and not destruction of the great industrial combinations 
would seem to be the wiser policy. Within the past quarter 
of a century, a radical change has come over the industrial 
world. These are days of immense undertakings, and large 
aggregations of capital are needed to carry them to success. 
Combinations with all their undoubted economic advantages 
should be encouraged by the government, and yet they should 
be so regulated that the evils that may follow upon great power 
and great wealth may be wholly abolished. 

QUESTIONS 

1. What are the different methods of doing business? 

2. How is capital obtained and where is the hability in individual estab- 

Hshments ? In partnerships ? 

3. What is an industrial joint-stock corporation? Explain the different 

kinds of stock issued b}^ corporations. How is tlie corporation 
charter secured ? 

4. What are the advantages of corporations? 

5. Explain the principal objections to corporations. What is stock 

watering? Illustrate by an example how stock watering injures 
consumers. 

6. What is a trust ? How is it organized ? 

7. What are the motives for the formation of trusts? What were the 

various means employed to eliminate competition? What methods 
are frequently employed by trusts to eliminate competition? 

8. How can a corporation fix the prices of its products? 

9. How can a trust economize? 

10. What is the trust problem? Are corporations in themselves an evil? 

11. What remedies exist against the wrongs practiced by corporations? 

Why are state laws inefficient? What are the objections brought 
against the Sherman Antitrust Law? 

1 2. What are the main features of the Clayton Trust Bill ? 

13. What is the Federal Trade Commission? 



CHAPTER XVIII 

GOVERNMENT REVENUE. TAXATION. PUBLIC DEBTS 

I. Sources of Revenue 

The body politic, or state, requires considerable resources for 
its existence and prosperous development, the promotion of its 
public well-being, the constant and effectual guardianship of 
justice, the preservation of peace and safety at home, and the 
maintenance of dignity and independence abroad. 

In the beginning, when the social organization was in its primi- 
tive stage, the matter of collecting funds for .the support of the 
government was comparatively easy. But as nations grew in 
size and embraced hundreds of thousands of subjects, the prob- 
lem of collecting government revenues became a very serious 
and a very difficult one, and still continues to be so, after years 
of thought and experiment. 

The sources from which the state realizes the funds neces- 
sary to its existence and well-being may be classed under three 
heads: (i) Public Domains and Public Businesses; (2) Fines, 
Fees, and Assessments ; (3) Taxes. 

Public Domains and Public Businesses. — The government 
may own and keep in its possession vast tracts of land within 
its own confines or in its foreign dependencies, and may thence 
derive a part of its revenue. 

The United States possesses great tracts of land in the West, 
containing immense stores of wealth in timber, pasture, and 
minerals. The public domain of the United States includes the 
following divisions of land : — 

(i) Purely agricultural lands ; 

(2) Desert lands ; 

325 



326 SOURCES OF REVENUE 

(3) Irrigable lands; 

(4) Precious metal and mineral lands; 

(5) Coal lands; 

(6) Timber lands; 

(7) Stone lands. 

In 1918 (June 30), the total acreage of the United States, 
including all possessions, was 2,395,804,160 acres. Unappro- 
priated lands amounted to 573,869,589 acres. The estimated 
area in existing national forests was 175,951,266 acres. 

Much of the public domain has been donated by the United 
States government for various purposes. Thus, from 1850 to 
1918 (June 30), the land granted by the United States for wagon 
roads and railroads amounted to 126,934,149 acres; and for 
educational and related purposes, to 133,426,478 acres. (Report 
Commissioner General Land Office, 19 18.) 

Lively interest centers at the present time in the government 
holdings, and it is the effort of the government to keep such lands 
from the greed and exploitation of private capitalistic monopo- 
lies. 

From such public lands revenue can be derived by the gov- 
ernment, either immediately, by turning them into government 
monopolies and operating them directly and securing the profits 
arising from the product; or mediately, by conceding to private 
individuals or corporations the right, under certain conditions 
and limitations, of exploiting the wealth of the lands. Again, 
the government can sell such lands outright to private owners. 
The aggregate cash receipts of the United States government 
from the disposal of public and Indian lands from May 20, 1785, 
to June 30, 1918, was $491,430,102. 

Belgium draws great revenues from its rich and extensive 
African possessions. North Carolina pays 25 per cent of its 
state expenses from the royalty upon the phosphate rock taken 
each year from its phosphate deposits. Canada receives large 
sums in royalties upon the gold mined in Canada. (N. M. 
Taylor, Elements of Taxation.) 

Again, government ownership of such public utilities as rail- 



FINES, FEES 327 

roads, telegraph and telephone service, the mail system, tobacco 
and liquor traffic may become a source of government revenue. 
In some countries where the government owns and controls 
such businesses, the purpose of such ownership and control is 
chiefly to regulate the businesses and to prevent the abuses that 
might arise under private ownership, but in many instances 
large revenues are derived from this source. 

Belgium and other countries of Europe manage to draw large 
revenues from the government railroads. Illinois gets annually 
from the Illinois Central Railroad 7 per cent of the railroad's 
gross receipts. This is by reason of a contract in the special 
charter given the railroad by the state. The amount received 
is nearly a million dollars a year and is 20 per cent of the state's 
annual revenues. Georgia receives about $300,000 a year from 
the rental of the Atlantic and West Point Railroad. (N. M. 
Taylor, Ih.) 

The United States government owns and controls the mail 
system, but, as hitherto managed, it has been conducted with a 
view to giving the most efficient service at a minimum cost to 
the users, without gaining any surplus revenue from it. In- 
deed, ordinarily, a yearly deficit has had to be made up out of 
the general taxes. 

Italy, Spain, and France have monopolies of the tobacco 
business and increase the public funds through that means. 
Switzerland has a salt monopoly. South Carolina has a monop- 
oly of the liquor business, but it is managed principally for the 
purpose of regulating the traffic. Many city governments have 
monopolies controlling the supply of gas, of water, of electric 
lighting, etc. 

One advantage derived from this source of government 
revenue is that there is no reduction of the incomes of the citi- 
zens, and the greater the increase of revenue from this source, 
the hghter is the burden of personal taxation. 

Fines. — Considerable revenue is derived from the system of 
fines imposed in criminal suits. 

Fees. — Fees are the charges collected by certain government 



328 SOURCES OF REVENUE 

officials for services rendered. They are in use in most coun- 
tries and furnish a large revenue. 

In the United States, the federal and state governments exact 
fees for various services. Thus, there are inspection fees; 
license fees; incorporation fees imposed on banks, insurance 
companies, and other corporations ; examination fees, for those 
wishing licenses as physicians, druggists, cientists, teachers, 
pilots, and attorneys; patent and copyright fees; custom-house 
fees ; land-office fees ; consular fees ; and court fees of various 
kinds. (Cf. Th. K. Urdahl, The Fee System in the United 
States.) 

The fee system, wherever carried out, opens a wide door to 
corruption, and in some cases imposes a severe burden upon the 
community. The compensation obtained by certain officials 
in city, county, and town in several states is made up wholly 
or in part of the fees collected by such officials in the administra- 
tion of their offices. The amounts received by them, in some 
cases, have reached an exorbitant figure. 

Large fees required for legal and court services are especially 
to be deprecated, because they frequently deter the poor from 
seeking redress against injustice. 

A remedy suggested in the matter is that the compensation of 
all officials should be a fixed salary, and that all fees received by 
such officials should be turned into the public treasury and ac- 
counted for. Where a mixed system of salary and fee is per- 
mitted, and a portion of the fees collected is allowed an official, 
the percentage he receives should be fixed. All fees should be 
turned into the treasury, and from the sum thus turned in, the 
official should receive his share. 

The advantage claimed for the fee system is that it is pro- 
ductive of greater efficiency on the part of the officials who de- 
pend on fees for their compensation. In the investigation of the 
Indiana State Fee and Salary Commission, in 1900, it was shown 
that when certain officials were paid by the fees they received, 
they executed their functions with great energy, and a large sum 
was obtained in fees. This all went into the pockets of the offi- 



ASSESSMENTS 329 

cials. When the fee system was replaced by a fixed salary, the 
fees were collected up to an amount sufficient to make up the 
salary, and after that, little interest was taken in the collection 
of the fees. As a result, the sum -of the fees collected was much 
less than it had been. 

The evils of the fee system, however, are so great that the 
necessity of reform in the matter has appealed to many govern- 
ments, and measures have been taken in that direction. (Cf. 
Report of the Indiana State Fee and Salary Commission, 1900 ; 
Report of the Ontario Commission on the Election and Mode of 
Paymeht of Certain Prominent Officials, 1895.) 
' Assessments. — These are demands made by local govern- 
ments upon property owners to help defray the expenses of 
certain improvements. The levy is made proportional to the 
amount of property owned or the degree of benefit derived by 
the property owner from the improvement. 

Such are assessments for the building of streets and sewers. 
Assessments often fall on the poor, in the form of the higher 
rents which they have to pay. 

Taxes. — A tax is a part of the wealth of the citizens appro- 
priated by the government for public expenses. The object 
of taxation is to defray the expenses of the government. The 
sources already mentioned w^ould not usually be sufficient to 
meet these expenses, except perhaps in the case of some small 
municipality or county. The government must have recourse 
to enforced contributions from the citizens, and to-day taxation 
supplies the greater portion of the government revenues. 

Through its revenues collected from the various sources just 
mentioned, the government is enabled to carry on its varied 
functions in procuring the means conducive to social order and 
security, and in affording the individual members of society the 
opportunity for the development of all their activities. In treating 
the subject of taxation, we shall define the basis upon which the 
right of taxation rests, enumerate the different kinds of taxes 
generally adopted, describe the incidence and the shifting of 
taxes, and, finally, give the general principles of taxation. 



330 



TAXATION 



II. Taxation 



Right of the State to Tax. — That the state or nation has the 
right to procure revenue by taxation, when this is done in form 
of law, is unquestionable. 

The right to tax does not rest on the principle, set forth by 
some writers, that the state has the right of eminent domain 
over all the property possessed by its individual members, and 
hence may claim a certain proportion of their wealth ; nor does 
it rest on the principle advocated by others, that an implied con- 
tract exists between the state and its members, the citizens, 
whereby the state may demand from its several citizens a mone- 
tary return for the protection which it gives them. 

The right to tax flows from the very nature and end of the 
state. The state, or social body, is an institution founded in 
the nature of man and intended by the Creator of man's nature. 
It has received from nature, through the will and intention of 
nature's Creator, all the rights needful to the attainment of its 
end. It possesses, therefore, the right to exact from its members 
that proportion of their wealth which may be necessary for the 
fulfillment of its aims. 

The purpose of the right to taxation possessed by the state 
determines also the limits of that right. The state cannot exact 
an amount of taxes beyond what will be sufficient to enable it 
to perform its several duties. The right to tax is not a limitless 
right. (Cf. Cathrein, Moralphilosophie, II, p. 626.) 

Taxes will be just when imposed by legitimate authority and 
when imposed for just causes. 

Kinds of Taxes. — Taxes are Direct and Indirect. 

Usually, taxes are divided into direct and indirect taxes with 
reference to the possibihty of the shifting of the tax. Thus, 
a direct tax is one that is paid directly by the person upon whom 
it is levied. An indirect tax is one that, though nominally levied 
upon one person, is really paid by others to whom the tax is 
shifted. In this sense, a poll tax is a direct tax, because the tax 
comes out of the actual possessions of the person taxed. Cus- 



DIRECT TAXES 331 

toms duties are indirect taxes, because the amount of the tax 
paid by the importer is paid back to him by the consumer in the 
higher prices caused by the customs duties. The consumer ac- 
tually pays the tax. 

Since nearly all taxes may be shifted to another by the person 
upon whom the tax is originally laid, a better division of taxes 
seems to be that adopted by certain writers, viz., a direct tax 
is one that is levied upon persons or property ; an indirect tax 
is one that is levied upon various objects of use and consumption. 
Examples will make the distinction clear. 

According to this interpretation, direct taxes will embrace: — 

1. Personal tax — poll tax. 

2. Property taxes — on personal property; on real estate. 

3. Mixed taxes — occupation tax. 

4. Income tax. 

5. Inheritance tax. 

6. Corporation tax. 
Indirect taxes will include: — 

I. Internal revenue taxes. 2. Export duties. 

3. Import duties. 4. Stamp taxes on papers. 

Direct Taxes. — (i) Poll Tax. — The poll tax is a tax of a 
certain amount on each member of a community. It is not 
levied at all in some states ; in others it is levied only on persons 
of voting age. 

(2) Property Tax. — The property tax is a tax levied upon the 
property, personal or real, existing in the community or pos- 
sessed by members of the community. It excels in simplicity. 
A man's possessions are estimated at their market value, and a 
certain percentage of that value is collected as a tax. The tax 
is in great measure certain and it is equitable, because it reaches 
those who have the means to pay. 

This kind of tax, however, is not easy to collect. In past 
times, when property consisted almost wholly of real estate, little 
difficulty was encountered in the collection of such taxes. The 
amount of the real property was easily ascertainable. But when 
people stored their wealth under the form of personal property, 



332 



TAXATION 



money, bonds, notes, bank accounts, credits, mortgages, checks, 
drafts, etc., it became a most difficult task for the taxgatherers 
to find out the real wealth of the owners. 

Three methods lie open to the government to arrive at a knowl- 
edge of the taxable property of the owners. 

One method is an inquisitorial search of the evidences of 
possession of property, made by government officials. This was 
much practiced in former times, when personal belongings were 
taxed and search had to be made to reveal their existence. Per- 
sons and private property were subjected to many vexations 
and abuses. The practice has been discarded. 

In the second method of determining the amount of taxable 
property, the owners are allowed to declare the amount of prop- 
erty they possess. Sometimes an oath is administered to the 
declarants, and penalties are imposed on those who are found to 
have attempted fraud. This method opens the way to much 
fraud and deceit on the part of owners of taxable property, who 
are tempted to make use of every means to conceal their owner- 
ship. It puts a premium on deception, and places the greater 
part of the burden of taxation on those who are upright and con- 
scientious enough to declare the full amount of their possessions. 

In the third method, the government officials estimate broadly 
the amount and the value of the property owned, and their 
estimate stands unless the owner proves (by his oath or other- 
wise) that the valuation is excessive. This method is open 
to the same abuses as the second method described above; 
besides, the officials fail to take any notice of large amounts 
of personal property really liable to taxation. 

Because of the difficulty of collection, many would advocate 
the exemption of personal property from taxation. Such taxa- 
tion, however, although generally ineffective in this country 
through inadequate tax laws or the neglect of officials to enforce 
the laws, is the source of considerable revenue. 

(3) Occupation Tax. — Taxes on occupations are, in the 
United States, limited to a small number, and they are imposed 
more with a view to regulate such occupations and prevent 



DIRECT TAXES 333 

violations of the law than with the intention of acquiring reve- 
nue. Special taxes, however, upon occupations of various 
kinds are frequently imposed, and are the means of bringing to 
the state considerable revenues. Many such taxes rendered 
necessary by the loss of revenue from other sources have been 
imposed in recent years. 

(4) Income Tax. — An income tax is one that is levied on 
incomes. The income taxed is net income. In all cases of per- 
sonal income tax a certain amount of income is exempt. In 
some cases the tax is a progressive tax, the rate of taxation in- 
creasing with the sum total of the income. Such is the income 
tax in New Zealand, Switzerland, and the United States. 

In taxing incomes, account should be taken of the fact whether 
the income is a permanent or a temporary one. A permanent 
income is one that endures indefinitely and arises from a fixed 
and permanent source, for example, the income from a landed 
estate. A temporary income is one that terminates after a 
certain period, as ten or twenty years, as, for example, an in- 
come in the form of salary, or the proceeds of an annuity. 

It would be unjust to place the same rate of taxation upon 
temporary as upon permanent incomes. He who receives a tem- 
porary income must out of that income provide for the future of 
his family or for his old age, when he shall have ceased to earn 
the income. He who receives a permanent income has no such 
need. The rate will, therefore, fall more heavily upon the 
temporary than upon the permanent income, and in propor- 
tion as it falls more heavily, so is injustice done. 

Income taxes present considerable difficulty in collection and 
open the way to much fraud and dishonesty. 

Income taxes exist in many foreign countries — England, 
Switzerland, Denmark, Prussia, Austria, Italy, Australia, India. 
They exist in several states in this country. In England, the 
income tax was at first adopted as a temporary measure. When 
in sore stress for money, Pitt, in 1798, imposed the income tax. 
It has since become a permanent method of taxation in England. 

In -the United States, a federal income tax law was enacted 



334 



TAXATION 



Aug. 5, 1861. It was repealed in 1872. In 1894, an income tax 
law was passed, but it was declared unconstitutional by the 
Supreme Court. A constitutional amendment permitting the 
levy of an income tax " without apportionment among the sev- 
eral states and without regard to any census or enumeration," 
was ratified by the required number of states, on Feb. 3, 1913. 

Since that time, the federal income tax has become a recognized 
method of raising revenue. The tax as levied by the federal 
government affects "every citizen of the United States, whether 
residing at home or abroad, and every person residing in the 
United States, though not a citizen thereof." The tax reaches 
the incomes of every one whatever the source of the income, 
whether from property owned, or business, trade, or profession, 
if carried on in the United States. A certain percentage of the 
income constitutes the normal tax. An additional graduated 
tax is imposed as a surtax upon incomes in excess of a definite 
amount. The surtax affects materially persons with very large 
incomes. 

The income tax is a source of considerable revenue to the 
state, and many claim that the surtax especially is beneficial 
because it reaches the excessive incomes of the very wealthy, 
distributes the burden of taxation among those who benefit most 
from social conditions, and affects those who are best able to 
contribute out of their surplus wealth to the support of the state. 
The income tax may, however, if excessive, prove disastrous to 
business. Much of the income received by men engaged in 
business is reinvested in business, and helps in the increase of 
production. When the income tax, especially the surtax feature 
of it, absorbs a large percentage of the income, wealth that could 
be used as capital in the promotion of industry is lessened, and 
production is hindered. Capital may be driven out of taxable 
industries into non-taxable securities, inducing unemployment, 
raised prices, and higher cost of Hving. 

(5) Inheritance Tax. — An inheritance tax is a tax " imposed 
upon the right to inherit property under the law or to receive it 
under a will." (N. M. Taylor, Elements of Taxation.) 



INDIRECT TAXES 335 

This tax is easily collected, as it is not difficult to learn the 
amount of property left by the deceased, and it arouses little 
opposition on the part of the heirs. The only way to defeat it 
is by a gift made before death. The tax is a source of consider- 
able revenue. 

England has a progressive inheritance tax. In the United 
States a progressive inheritance tax was imposed on Sept. 8, 
1916, and amended on later dates. Many of our states have 
laws providing for inheritance taxes. 

(6) Corporation Tax. — Several states have corporation taxes. 
It is the practice in such states to estimate the value of the 
property of the corporation and its franchises, if any are pos- 
sessed by it, and to fix the tax rate at a proportional figure. 

The federal income tax law affects the incomes of all corpora- 
tions organized in the United States, or organized by laws of 
foreign countries and receiving income from business transacted 
or capital invested in the United States. The tax is a definite 
percentage of the net income. Deductions are allowed for ex- 
penses for maintenance and operation, losses, depreciation, in- 
terest on indebtedness, and taxes. Beneficiary, labor, charitable, 
religious, and educational corporations are exempt from the 
tax. 

Indirect Taxes. — (i) Internal Revenue Taxes. — Internal 
revenue taxes are taxes imposed on the products of a country. 
These taxes are paid immediately by the producers to the gov- 
ernment, but ultimately by the consumers, to whom the producers 
shift the tax by raising the prices of the articles. 

The revenue derived from this source may be very great, as 
the taxes may be widely distributed over a vast number of 
articles, and may be so moderate that they may prove an insen- 
sible burden to the people. 

In such a form of taxation, however, it is difficult to maintain 
any just proportion of equaHty of taxation. To preserve equal- 
ity and to collect the greatest amount of revenue, those com- 
modities might be taxed which are used practically by all the 
people, and which are of daily need to all the people. Such would 



336 TAXATION 

be the necessaries of life. But in that case the greatest burden 
would be felt by the poor and those in moderate circumstances. 
The poor and the rich absorb practically equal portions of the 
necessaries of life, but whereas the wealthy would experience 
little difficulty in meeting the charges, the poor would find the 
burden most oppressive. 

Hence, when this source of revenue must be resorted to, it is 
more equitable to exempt from taxation as far as possible the 
necessaries of life, and to restrict the taxes to such articles as 
constitute the luxuries of life or such as may demand the re- 
strictive regulation of the government. 

In the United States Internal Revenue taxes are limited to a 
few articles, such as need government regulation because of the 
menace they may be to the moral or physical well-being of so- 
ciety. Considerable revenue is collected from this source. 

The articles taxed are distilled spirits, fermented liquors, to- 
bacco, oleomargarine, adulterated and renovated butter, filled 
cheese, opium, mixed flour, playing cards. 

(2) Export Duties. — Export duties are taxes upon commodi- 
ties leaving the country. Such taxes are rarely imposed. In 
the United States they are forbidden by the Constitution. 

(3) Import Duties. — Import duties are taxes levied upon 
articles entering the country. This method of taxation is fre- 
quently resorted to. 

It offers the advantage of simplicity and promptness of col- 
lection. The tax is paid by the importers immediately upon the 
entrance of the articles into the country. As in the case of inter- 
nal revenue taxes upon commodities, here too the taxes imposed 
upon commodities fall ultimately upon the consumers of the 
commodities, who pay them in the raised prices. 

Again, as in the preceding case, the duties on imports that 
constitute the necessaries of life should not be excessive. That 
would be putting an unjust burden upon the poor, who would 
have to pay the increased prices demanded for such necessaries. 
The cost of living would be raised. It may be that in time, ow- 
ing to popular demand, a rise in wages would be brought about 



INCIDENCE AND SHIFTING OF TAXES 337 

to meet the higher cost of living among the laboring poor. In 
that case the original tax would be shifted in part at least to the 
employing class, who would pay the increased wages. This, 
again, would be partial taxation and in so far unjust. 

Moreover, the effect would be that a certain amount of capital 
would be taken out of production and there would result a dimi- 
nution in the wealth of the country. For the increase of wages 
would seriously affect many producers, and would drive out of 
business that numerous class of producers who were barely cov- 
ering expenses when wages, an important item in the cost of 
production, were at the previous low rate. 

It is contended by some writers that taxes should be levied on 
the manufactured articles rather than on the raw material that 
enters into the articles. The article, in passing from the raw 
to the finished state, has frequently to go through many pro- 
cesses and through the hands of many sellers. Each seller will 
charge the tax plus his own profit on the commodity, and when 
the commodity reaches the ultimate consumer, it bears the bur- 
den of the tax together with all the intermediate profits. Glad- 
stone, in 1880, sought to abolish the tax on malt and to substi- 
tute in its stead a tax on beer. 

Customs duties in general have this evil effect, that they re- 
strict the import trade and thus reduce the source of revenue of 
the government. This is especially the case when the tariff 
duties are so high that they become prohibitive. 

(4) Stamp Taxes on Papers. — Stamp taxes are imposed in 
times of special urgency on bank checks, telegrams, transfers 
of stocks and bonds, bills of exchange, etc. Taxes of this kind 
were imposed in the United States during our late wars. 

These taxes are easy of collection and yield a large revenue. 
They are paid by the persons using the various kinds of paper in 
the form of stamps affixed to the documents. 

Incidence and Shifting of Taxes. — To determine the inci- 
dence of taxation is to determine the person who really pays 
the tax. Taxes do not always fall on the persons apparently 
affected by the levy. They may at times be transferred. This 

POL. ECON. — 2 2 



338 TAXATION 

transference of a tax from one person to another is called the 
shifting of the tax. 

The mobility of a tax and its power to shift from one person to 
another, from one class of society to another, may be illustrated 
as follows : Farmers may be taxed on the produce of their land. 
They shift the tax to the wholesale dealers, who buy the products 
of the farmers, and who pay the prices of the products increased 
by the amount of the tax. The wholesale dealers charge the 
tax upon the retail dealers, and the latter pass on the tax to the 
consumer. The tax may stop here, and the incidence of the tax 
will be on the consumer. 

In some cases, however, there will be still further shifting. 
The consumer is a laborer, and the commodities he buys enter into 
the cost of living. The greater the cost of living, the dearer will 
be his labor. Labor is paid for in wages. Hence the laborer will 
demand higher wages, and the tax is thus transferred to the 
employer who pays the higher wages. 

The question of the shifting of taxes is very important, and 
should engage the attention of the government when it imposes 
a tax. Through the shifting process, it may be that some escape 
all burden of taxation, while those who are really made to bear 
the burden are the ones least able to do so. 

The incidence of indirect taxes is never on the person who first 
pays the tax. In the case of customs duties, the tax is primarily 
paid by the importer, but it is shifted to the consumer of the 
imported articles, who pays the tax in the raised prices of the 
articles. The burden is felt wholly by the consumer. The 
same happens in all internal revenue taxes. They are paid 
ultimately by the consumer. 

In such instances the fact and the method of the shifting of 
the taxes are apparent, and the government, in imposing such 
taxes, knows where the incidence Hes. 

Much difficulty exists in determining the incidence of direct 
taxes, and economic writers are little in accord on the question of 
the several direct taxes. 

The Physiocrats claimed that all taxes ultimately fall on the 



INCIDENCE AND SHIFTING OF TAXES 339 

land: wherever they may be originally placed, they can be 
traced back until they finally fall on land. It was for this 
reason that they advocated a direct tax on land as the main 
source of government revenue in preference to a multiplicity of 
taxes which indirectly reverted to land. 

It is generally admitted, however, that the poll tax, the 
inheritance tax, the personal property tax, and the income tax 
cannot be shifted. Yet even here exceptions may be found. 
An income tax which affects income derived from salaries or 
wages may be shifted to the employer, who has to pay higher 
salaries and wages. Again, when the income tax is paid not out 
of the profits of a business, but out of capital, the burden is felt 
principally by the laboring class, since every curtailment of 
capital diminishes the demand for labor. 

Certain kinds of personal property will not allow of any shift- 
ing, e.g. household property, pictures, jewelry. But the tax on 
manufactured articles in the factory or in the store will ordi- 
narily be shifted to the consumers of such articles. 

Taxes that fall on consumption through the process of shifting 
are declared by some economists to be preferable to those taxes 
which must be paid by the persons immediately levied upon and 
which cannot be shifted. In the former case the burden is not 
felt by any one class. There is diffusion of the onus throughout 
society, and the disagreeableness of taxation is minimized, as the 
people do not notice the tax so much. Again, there is not the 
same inducement to dishonesty. 

The United States government has always derived its rev- 
enues largely from this kind of taxes. The ordinary receipts of 
the United States in 1920 amounted to $6,704,414,438. The 
revenue received from Customs and Internal taxes (including 
income taxes) was, in the same year, $5,722,685,804, over 85 
per cent of the total receipts. (Stat. Abstr., 1920, p. 769.) 

Were, however, this method the only one employed, the in- 
convenience of taxation would be felt mostly by the poor, and a 
very inconsiderable burden would be placed upon many persons, 
who, being possessed of large means, should be reasonably ex- 



340 TAXATION 

pected to contribute to the support of the government according 
to their recognized ability. 

As a matter of fact, the various classes of society gradually 
adapt themselves to the taxes imposed by the government. Eco- 
nomic conditions little by little conform to the demands made, 
and in regard to most forms of taxation the burden becomes 
widely distributed through the process of shifting. When the 
people have become reconciled to a definite kind and method of 
taxation, it is unwise to disturb the social and economic quiet by 
repeated readjustments of taxes. 

Principles of Taxation. — The general principles affecting 
taxation are as follows : — 

I. The taxes ought to be proportioned among the members of 
society according to their respective abilities. 

This principle regards the equity of the tax. The possessions 
of the members of the state constitute the source from which 
taxes can be levied. Where there are no possessions of any kind, 
there can be no tax. The possessions of a citizen may consist 
of property, real or personal, and income derived from property 
or from labor. The ability to pay taxes will depend on the 
amount of possessions in the shape of property or income pos- 
sessed by the payer. 

All the members of society should bear a part of the burden of 
supporting the state, but it would be manifestly unjust to impose 
unconditionally a fixed and equal amount to be paid by each and 
every member of society. 

Such a definite tax might be a light burden upon those who are 
rich, but it would be heavy upon those who possess little of this 
world's goods. The poor would be forced to contribute relatively 
more than the rich. Ten dollars a year would not be felt at all 
as a burden by the owner of a million dollars, but it would be a 
serious matter for those who are scarcely able to provide for 
themselves and their families the mere necessaries of life. 

Taxes that would deprive a man of the capital or income abso- 
lutely essential for his own and his family's existence, or for the 
carrying on of his business, and that would prevent his sharing 



PRINCIPLES OF TAXATION 341 

in production, whereby the wealth of the country is increased, 
would injure the individual and would mediately destroy the 
general well-being of the nation. 

Again, two individuals may have the same amount of pos- 
sessions, but the possessions of one may be so affected by cir- 
cumstances that they may not be able to bear an equal pro- 
portional rate of taxation. Thus, the possessions of one may 
be employed in business, may be engaged in a less lucrative 
occupation, or may be needed for the support of a larger family. 

The equality of taxation that is advocated as the first principle 
of taxation does not mean, then, that all should be taxed equal 
amounts. Such a tax would be unjust. 

Taxes should be proportional to the material ability of the 
taxpayers to pay taxes, i.e. to the amounts of the worldly 
possessions of the payers viewed with regard to attendant cir- 
cumstances, and the degree of sacrifice endured by the payment 
of the taxes. 

" Equality of taxation, therefore, as a maxim of politics, 
means equality of sacrifice. It means apportioning the con- 
tribution of each person towards the expenses of government, 
so that he shall feel neither more nor less inconvenience from his 
share of the payment than every other person experiences from 
his." (J. S. Mill, Political Economy, II, p. 308.) This is the 
doctrine most commonly held to-day. 

Another view that is sometimes set forth is that every one 
should contribute according to the amount of benefit in the way 
of social protection and help he derives from the state. This 
imust be rejected, because it reposes on the false conception that 
taxation is a right of the state by reason of a tacit contract be- 
tween it and the taxpayer, through which the latter is obliged 
to give a quid pro quo, so much money for so much social benefit. 
Taxation reposes, as we have seen, on a natural ordination and 
not on any mutual contract. 

It is true that a man possessed of a thousand acres of land, 
of houses and industrial plants, needs, in one sense, more pro- 
tection from the state than does the poor man who owns no 



342 TAXATION 

realty ; but property is not the only thing that needs and re- 
ceives the benefit of social organization. This benefit regards 
also the persons and the activities of the members of society, 
and, from this point of view, the poor need more protection from 
the state than do the wealthy. The principle, therefore, would 
require, that while the tax imposed on the wealthy would be 
higher than that imposed on the poor, on the score of posses- 
sions, it would be higher for the poorer classes than for the 
wealthy, on the score of personal needs and dependency. 

2. Taxes should be certain. 

That the taxes should be certain is a rule which, in the opin- 
ion of many, takes precedence over the equable distribution of 
the tax. 

It is claimed that it is morally impossible to arrive at absolute 
equality of burden imposed by taxation. Whatever efforts 
may be made to adjust the sacrifices,' some will always feel the 
burden more than others, sorae will feel it more at one time than 
another, but in the course of time, when there exists no very 
glaring inequality or injustice, the members of society gradually 
come to resign themselves to the inconvenience, and, through 
the gradual shifting of the taxes, the burden becomes distributed 
throughout the different classes of society. 

It is, however, important that there should be certainty in 
the amount of revenue derived from taxation. Indeed, the 
amount to be collected, the method of collecting, the times and 
places of the collecting, should all be definitely fixed. 

People do not, as a rule, take graciously to the payment of 
taxes, even when the system of collecting the taxes is as perfect 
as it can be made. Taxpaying is a disagreeable duty. It is 
made all the more disagreeable when the taxpayers are left in 
uncertainty with regard to the amount to be paid, the articles 
upon which taxes are levied, and the time of collection. 

In some Eastern countries, much inconvenience and loss were 
incurred through the uncertainty of the time at which the col- 
lectors would come to collect the taxes. Because the crops could 
not be gathered in until the collector appeared to estimate their 



PRINCIPLES OF TAXATION , 343 

value and levy the tax, the delay in the anival of the collector 
often brought about the loss of the entire crop, which rotted in 
the fields. 

The ad valorem duties levied on imported goods lie open to 
objection under this rule. There is less certainty with regard 
to the amount that can be collected under this method than there 
would be if specific duties were levied instead. 

3. Taxes should be levied at a time when the taxpayers find 
it most convenient to pay them. 

When taxes are thus levied, much of the disagreeableness is 
taken off the burden. In this particular, indirect taxes have an 
advantage over direct, since the consumer, on whom the in- 
direct tax falls, pays the tax when he buys the commodities. 
He can, in many cases, refrain from buying the article alto- 
gether, or he can limit his purchase in proportion to the amount 
he is content at the moment to pay. 

Bonded warehouses here offer an advantage in permitting 
the merchants to defer the payment of the tax on goods they 
have bought, until such time as they are ready to take them out 
or until purchasers appear for them. 

In the same way, bills of exchange made out for long periods 
allow the sellers of goods to defer the payment of taxes until the 
goods have been paid for by the purchasers. 

4. " Every tax ought to be so contrived as both to take out 
and to keep out of the pockets of the people as little as possible 
over and above what it brings into the public treasury of the 
state." 

Taxation ought to be as economical to the state as possible. 
It is unwise to impose taxes of such a nature that for various 
causes the benefit derived to the state will not be proportionate 
to the losses sustained by the taxpayers. There are several 
signs by which such uneconomical taxes may be recognized. 

(i) Taxes are uneconomical when they have the effect of 
lessening production. Excessive taxation will produce this 
result. It will cause capital to withdraw from productive en- 
terprises, and the wealth of the country will decrease. " When 



344 TAXATION 

taxation absorbs too large a share of the produce, labor is dis- 
couraged and economic decline sets in. Under Louis XIV, 
vines were uprooted to escape the taxes called Aids, which, 
according to Vauban, often amounted to the price of the vin- 
tage. The two most powerful empires of the world, the Roman 
and that of Charles V, were both ruined by excessive taxation." 
(E. de Laveleye, Elements of Political Economy, transl. by A. W. 
Pollard.) 

Should the land tax exceed the economic rent of the land, the 
land will not be cultivated and production will decrease. When 
production is thus affected, the very source of taxes is lessened. 

When taxes exceed the incomes, the taxes must be paid out 
of capital. This may not be an evil, nor can it always be avoided, 
but the diminution of capital should not be so great that it 
would bring about a marked decrease in production. 

Should the tax on personal property be excessive, greater 
efforts will be made to conceal its ownership, and the owners 
may be driven to take up their domicile in other lands. 

If heavy taxes are placed on productive property, industry 
will be hindered and the wealth of the country will be reduced. 
" In many villages in Palestine, the wealth-bringing palm trees 
have been torn up, because each tree was taxed." (E. de 
Laveleye, Ih.) 

(2) Taxes are uneconomical when they "require a great ex- 
penditure in collecting, due to the establishment of numerous 
officers and bureaus. Internal taxes on particular commodities 
would entail great expense in the collection. Such taxes were 
frequent in England in the past. 

(3) Taxes are uneconomical when labor and capital are de- 
flected by them from more productive to less productive in- 
dustries. This happens, as was seen in preceding pages, as 
the result of tariff duties which divert capital and labor .into in- 
dustries from which the returns are less in profit and in product, 
in proportion to the amount of capital and labor employed, than 
they would be if employed in self-supporting industries. 

(4) A tax is uneconomical when many are ruined by the 



PRINCIPLES OF TAXATION 345 

penalties and fines imposed on them for attempted evasion of the 
tax, and their capitals are withdrawn from active cooperation 
in the prosperity of the country. 

(5) A tax is uneconomical when people are subjected "to the 
frequent visits and odious examinations of the taxgatherers, 
and exposed to much unnecessary trouble, vexation, and op- 
pression." (Cf. Adam Smith, Wealth of Nations, Bk. V, ch. 2.) 

The preceding four law^s are laid down by Adam Smith and 
have become classical. In addition to these, the following 
principles may be given : — 

5. The property of all persons should be appraised for taxa- 
tion at the same ratio of value. 

6. Taxes should be levied only for public purposes. Any tax 
that helps only one individual class is unjust. 

7. Double taxation should be avoided, as it imposes a two- 
fold burden upon the taxpayer. There is double taxation, for 
example, when the same objects or occupations are levied upon 
by both federal and state governments. 

8. " Taxes ought never to be- raised from immoral sources, 
such as lotteries and gambling houses." (De Laveleye, Elements 
of Political Economy, transl. by A. W. Pollard.) 

9. All those things which constitute the necessaries of life 
should as far as possible be exempt from taxation. Instead of 
the necessaries, those things should preferably be taxed which 
conduce to the superfluous luxury of the wealthy, or which may 
become a menace to the morals of the community. 

10. In like manner, in customs duties imposed on imports, 
those foreign articles should be taxed which minister to the 

• luxurious tastes of the rich, rather than those which are of daily 
need to the poor. 

11. Personal property, which is generally unproductive, 
should be taxed rather than immovable property which is em- 
ployed in a productive capacity and serves in the various in- 
dustries to increase the wealth of the country. 

12. Establishments which, like hospitals, etc., are intended 
for the use of the public should be free from taxes. 



346 PUBLIC DEBTS 

III. Public Debts 

Public Loans. — When a country cannot collect through taxa- 
tion sufficient revenue for the maintenance of the government, 
it must resort to raising money by loans. 

A country contracts a debt when it issues bonds which mature 
at some future date and pay interest until maturity. All the 
holders of such bonds become the creditors of the government. 

The money lent to the government on bonds may come from 
the inhabitants of the country ; or the bonds may be bought 
up in great measure by foreign bankers and investors, and thus 
a large amount of foreign capital may be brought into the 
country. This is an advantage in one sense, but when a country 
that has borrowed abroad comes into financial straits, it may be 
exposed to disagreeable interference on the part of the foreign 
powers whose monetary interests become endangered. 

Bond issues made in order to raise revenue impose a burden 
upon future generations. The interest on the bonds must be 
paid until the maturity of the bonds, and this interest as well as 
the principal ultimately must come from taxes imposed on the 
citizens. 

Loans should not ordinarily be resorted to as a means of 
raising revenue. The country should depend on its own internal 
resources and find in taxation a sufficient source of revenue. 

It is contended that there are only two circumstances that 
would reasonably warrant government loans : — 

1. The sudden emergency of a war, which may not easily 
be foreseen and which will entail extraordinary expense. 

2. The construction of public improvements that will benefit 
not only the present generation but all generations to come. 
When such public works are to be made use of by future genera- 
tions, it is only right that they should bear a part in the expense. 

Public Debts. — The debts contracted by a government are 
of various kinds : — 

(i) Floating Debt. — A floating debt consists of the short- 
term obligations of the government, unsecured by any fund. 



QUESTIONS 



347 



Such obligations resemble the current obligations in the form 
of promissory notes incurred by business men in the course of 
business. 

(2) Funded Debt. — A funded debt consists of formal obli- 
gations issued by the government guaranteeing the payment of 
interest up to maturity and the payment of the principal at 
maturity. These obligations are government bonds. 

(3) Refunded Debt. — A funded debt represented by bonds 
bearing a certain rate of interest may, before or at maturity, be 
changed into a new debt represented by bonds bearing a lower 
rate of interest. The debt is then said to be refunded. In 
1900 (Mar. 14), the 3, 4, and 5 per cent bonds of the United 
States then outstanding were converted into the 2 per cent 
consols ; that is, the older bonds were paid off with the money 
raised by issuing the new bonds. 

On Oct. 31, 192 1, the interest-bearing debt of the United 
States was as follows: 



Consols of 1930 2 % 

Loan of 1925 4 % 

Panama Canal Loans 2, 3 % 

Conversion Bonds of 1946-47 .... 3 % 

Postal Savings Bonds 2^% 

First Liberty Loan 33^> 4, aM% 

Second Liberty Loan 4, 43^% 

Third Liberty Loan 4^% 

Fourth Liberty Loan 4/4% 

Victory Liberty Loan 3/4.4^4% 

Treasury Notes 53^, S^/i% 

Certificates of Indebtedness (various) .... 
War Savings Certificates and Thrift Stamps 



(Financial Statement, U. S. Gov.) 



$599,724,050 

118,489,900 

124,901,580 

28,894,500 

11,774,020 

1,952,162,100 

3,314,095,200 

3,608,919,350 

6,350,938,950 

3,644,895,400 

701,897,700 

2,078,593,000 

663,969,378 

$23,199,255,128 



QUESTIONS 



1. What are the sources of government revenue ? 

2. What is the extent of the public domain of the United States? 



How 



can revenue be derived from it ? 



34S PUBLIC DEBTS 

3. How can public businesses become a source of revenue ? 

4. How is revenue collected through fines, fees, and assessments? What 

are the evils of the fee system ? What advantage is claimed for it ? 

5. What is a tax ? Whence arises the right of the state to tax ? 

6. Give the different kinds of taxes. Explain briefly each kind. Why 

are some taxes called direct taxes, and others indirect taxes ? 

7. What methods are used to gain knowledge of the property of tax- 

payers ? 

8. What occupations are taxed in the United States ? 

9. What is an income tax ? Does there exist a federal income tax in the 

United States? What income is taxed? What is a progressive 
income tax ? What is a permanent income ? A temporary income ? 
Should both be taxed equally? 

10. What is an inheritance tax? 

11. How are taxes on corporations estimated? Explain the federal cor- 

poration tax as it exists in the United States. 

12. What are internal revenue taxes? Who pay them? What difficulty 

is presented in internal revenue taxes? W^hat articles are taxed in 
the United States for internal revenue? 

13. What are export duties ? Import duties ? Why should excessive im- 

port duties not be levied on the necessaries of life ? 

14. What are stamp taxes? 

15. What is meant by incidence of taxes? Shifting of taxes? Illustrate 

the shifting of a tax. What taxes are shifted? What taxes cannot 
be shifted ? 

16. Are indirect taxes better than direct taxes? 

17. Give briefly the principles affecting taxation. Explain each one, 

18. What is meant by equality of taxation? What is meant by saying 

that taxes should be certain? 

19. How can taxes prove uneconomical? 

20. How are government loans made ? When are government loans 

justifiable ? 

21. What is a floating debt ? A funded debt? A refunded debt ? 



CHAPTER XIX 
INSURANCE 

Definition. — Insurance is a contract by which one party, the 
underwriter or insurer, agrees, for a consideration, to make good 
a loss sustained by another party. 

History. — Although modern insurance was quite unknown 
in past times, yet there are traces of insurance of some sort 
as far back as the Middle Ages. Probably the first indication of 
it may be found in the loans in bottomry, which appear in the 
thirteenth century. 

Bottomry loans resembled a wager. The owner of a ship 
about to set out to sea wagered with a money lender that his 
ship would be lost on the voyage. The amount of the wager 
was a definite sum of money, which was advanced to the ship- 
owner. If the ship was lost, the money lender was out the 
amount of the wager. If the ship returned, the money lender 
won the wager and received the amount advanced together 
with interest. 

The principle of insurance was carried into practice in Italy 
in the beginning of the fourteenth century. In the books of 
Del Bene e C'i are found the costs of insurance in sea and land 
transportation for the years 13 18-13 20. The oldest ofiicial docu- 
ment pertaining to insurance is dated April 22, 1329. (Huppert, 
" Versicherungswesen," in Staats Lexicon.) 

A species of insurance or help extended to the sick and the aged 
prevailed among the guilds of the Middle Ages. {Journal oj 
Political Economy, Sept., 1903, pp. 589, 590. Cf. Frankel and 
Dawson, Workingmen^s Insurance in Europe, p. 169. Cf. E. 
Levasseur, Histoire des classes ouvrieres et de Vindustrie en France 
avant lySg.) 

349 



350 INSURANCE 

Record of payment of indemnity for losses by fire may also be 
found among the guilds. {International Encyclopedia, " Fire 
Insurance.") 

Evidence exists of the practice of insurance in Genoa in the 
fourteenth and fifteenth centuries. The first Mutual Insurance 
Company is found in Portugal, in 1383. (Huppert, "Versich- 
erungswesen," in Staats Lexicon.) 

Stock companies began in the seventeenth century. (Hup- 
pert, Ih.) 

Before the beginning of the eighteenth century, Italy, Spain, 
Portugal, and the Netherlands carried on insurance against 
risks at sea. After that time, there sprang up in England nu- 
merous companies insuring against transport risks. (Huppert, 

lb.) 

Traces of life insurance may be found in the fifteenth century 
(Huppert, Ih.), but it developed principally in the eighteenth 
and nineteenth centuries. In America, it appears for the first 
time in 1759, in Philadelphia, in the form of the Presbyterian 
Annuity and Life Insurance Company. In Massachusetts, it 
makes its appearance in 181 2 as the Massachusetts Life In- 
surance Company. {Intern. Encycl.) In 1830, the New York 
Life and Trust Company, and in 1842, the Mutual Life Insurance 
Company were organized in New York. 

Fire insurance appeared in England in the seventeenth cen- 
tury. It gradually spread over the whole world during the 
eighteenth and nineteenth centuries. 

Present Extent of Insurance Business. — The business of 
insurance has advanced rapidly and extensively, so that to-day 
the amount of money invested in insurance of various kinds 
runs into the billions of dollars. 

Insurance in its various forms, life, fire, marine, industrial, 
casualty, reaches every species of social activity, and exerts an 
influence on every phase of society. Its vast accumulations of 
wealth, invested in countless enterprises, contribute in no small 
degree to the development and prosperity of the state. 



PRESENT EXTENT OF INSURANCE BUSINESS 35 1 

The following tables will help to show the extent of insurance 
business : — 



I. Foremost American Life Insurance Companies, 19 19 



New York Life, N. Y. , , 
Metropolitan, N. Y. . . , 
Equitable Life, N. Y. . , 
Mutual Life, N. Y. . . , 

Prudential, N. J 

Northwestern Mutual, Wis. 



Insurance 
IN Force 



)3, 1 2 7,000,000 
2,765,000,000 
2,270,000,000 
2,089,000,000 
1,947,000,000 
1,916,000,000 



Gross Assets 



^96 1, 000,000 
864,000,000 
599,000,000 
662,000,000 
598,000,000 
440,000,000 



(Insurance Yearbook, 1920.) 



II. Life Insurance in Force in Various Countries, 191 2 



United States .' . $18,002,000,000 
Germany .... 3,368,000,000 

Canada 860,000,000 

Switzerland .... 191,000,000 



Austria .... $1,035,000,000 

France 708,000,000 

Scandinavia. . . . 586,000,000 
Russia 537,000,000 



(Insurance Yearbook, 191 2.) 



III. Fire and Marine Insurance Companies in U. S., 1919 

Capital $163,000,000 

Total Assets 1,391,000,000 

Total Income 884,000,000 

Fire Losses paid 335,000,000 

Dividends paid 52,000,000 

Net Premiums 810,000,000 

(Insurance Yearbook, 1920.) 



352 INSURANCE 

IV. Gross Assets of Foremost American Fire Insurance Companies, 

1919 



Home, N. Y. . . . 
Hartford, Conn. . . 
Continental, N. Y. , 
^tna, Conn. . . . 
Great American, N. Y. 



$54,000,000 Insurance Co. of N. A. $34,000,000 
50,000,000 Fidelity-Phenix, N. Y, 25,000,000 
39,000,000 National, Conn. . . . 24,000,000 
37,000,000 Phoenix, Conn. . . . 21,000,000 
33,000,000 Springfield Fire & Ma- 
rine, Mass. . . . 17,000,000 
(Insurance Yearbook, 1920.) 



V. Casualty Insurance in the United States, 1919. Premiums 

Received 

Accident $55,636,000 

Health 13,368,000 

Liability 7S,537,ooo 

Burglary and Theft 12,103,000 

Fidelity 14,755,000 

Surety 26,426,000 

Plate glass 9,488,000 

Steam boiler 4,607,000 

Workmen's Compensation 102,498,000 

(Insurance Yearbook, 1920.) 

Nature and Advantages. — The special economic importance 
of insurance is found in the fact that it reduces the aggregate 
social cost of providing against the risks from personal accident, 
fire, shipwreck, and other calamities to which the members of 
society are exposed in the course of business. 

All men run a certain amount of risk, and the more engaged 
one becomes in the various activities of life, the greater number 
of risks does one run. The uncertainty of the time of death or 
bodily accident faces all men. The business man is exposed to 
dangers necessarily connected with his business — fire, explosions, 
earthquake, shipwreck, strikes, dishonesty of employees, etc. 

Every prudent man engaged in business must take account 
of the risks he incurs and must insure himself against the many 
uncertain losses to which he is exposed. He must set aside 



THEORY 



353 



a part of his capital and establish a fund to reimburse himself 
when actual disaster befalls him. 

If he insures himself, the fund must necessarily be very large, 
and should there be no other means save individual insurance, 
the amount of money set aside by all the individuals in the shape 
of individual insurance funds would be enormous, and would 
diminish considerably the amount of money available for pro- 
duction. When an insurance company undertakes the business 
of insurance, the fund set aside need be but a very small pro- 
portion of the sum required in the case of individual insurance. 

Each individual is enabled to make an immense saving by 
transferring his risks to a company that deals in insurance busi- 
ness. He attains his end by the payment of a comparatively 
small insurance premium. Herein consists the great economic 
advantage of insurance. 

A second advantage of insurance lies in the fact that the losses 
sustained through the calamities to which all men engaged in 
business are exposed, are widely and lightly distributed over a 
great number of persons and do not fall solely and crushingly 
upon the individuals who actually suffer the losses. 

Insurance, moreover, becomes an important economic factor 
in production, by gathering together from many small sources 
a vast sum of money which serves as possible capital in various 
productive industries. In this manner insurance resembles 
banking. 

Again, life insurance, for example, offers special advantages 
over the savings bank, for a person who has put his money in 
a savings bank may withdraw it at any time from the bank, 
whereas money invested in life insurance ordinarily remains 
there. 

Insurance is an indirect aid to production by doing away with 
the fear of the risks and uncertainties of business ventures, 
and by encouraging men to embark in productive undertakings 
with greater zeal and larger expenditure of capital. 

Theory. — An insurance company can do, without loss and 
even with great gain to itself, w^hat it would be extremely burden- 

POL. ECON. — 23 



354 INSURANCE 

some for many individuals to do for themselves. It can do this, 
because of the operation of several principles which lie at the 
foundation of insurance. 

The risks of several thousands of individuals are grouped 
together. Each individual pays a small sum into what becomes 
a general fund, out of which the losses are to be paid upon the 
occurrence of some uncertain accident. The average losses 
that occur in a given time may be found from the actual losses 
that have occurred in several periods of the time in the past, 
and the amount of the premiums may be so fixed that the sum 
accumulated from them may cover the probable average losses 
in the coming given time, besides paying the operating expenses 
of the company. Many who have paid their premiums will 
escape all loss, and these will help to pay the actual losses that 
do occur in the given time. 

For the actual losses that do occur in the given time, the in- 
surance company will have to pay out of its fund accumulated 
from the premiums it has received, but these premiums are put 
at such a figure that they will cover the probable losses in the 
given time. If the actual losses of a certain company should 
happen to exceed the probable losses, the company would lose 
money or fail ; but the greater the number of cases insured, the 
less is the risk that the actual losses of the company will exceed 
the average losses. 

Hence, the danger the insurance company runs of meeting 
failure diminishes with the number of insured persons it can 
gain. " According to a well-established law, the probable 
variation increases only as the square root of the number of cases. 
If there are a hundred times as many houses, there will be only 
ten times as much probable variation from the average loss." 
(Seligman, Principles of Economics, p. 555.) 

A practical example may illustrate the principles affecting 
insurance : An insurance company insures 1000 individuals. 
Each is insured in the sum of $5000, making a total of $5,000,000. 
The table of averages of occurrences of the event insured 
against, e.g. death, accident, sickness, fire, or whatever it may 



THEORY 355 

be, gives, for instance, the figure 45 as the average number of 
times the event will happen among 1000 persons in one year. 
Out of the 1000 persons, 45 will die or fall sick, or suffer fire or 
other loss in the ensuing year. This average number, 45, is 
got by a study of past years. In several previous yearly periods, 
it was found that on the average 45 out of 1000 suffered loss. 

In any particular group of 1000 persons, however, the num- 
ber who suffer loss may frequently vary 5 above or below the 
general average ; that is, the number may be 50 or 40. The 
insurance company therefore makes its plans on the basis of 
50 losses. This would entail an outlay of $250,000 for the year. 
The premium paid by the 1000 individuals will have to equal 
in the aggregate $250,000, or, the individuals will have to pay, 
in premiums, each $250.^ 

Notice here the economic saving. Instead of the 1000 in- 
dividuals having to put aside the sum of $5,000,000, to reim- 
burse them for the loss to which they are exposed, as they would 
have to do if they would insure themselves individually against 
the loss, only $250,000 is accumulated for the same purpose; 
and instead of each individual putting aside $5000 as a fund 
against loss, he need pay but $250 for the same end. 

If the actual losses during the year are below the number 
provided for, if they are, for example, 47 instead of the 50, the 
year's outlay among the 1000 insured will be $235,000. After the 
company has paid out the sum, $235,000, it has left $15,000, the 
excess out of the $250,000 it originally received in the form of 
premiums, and this sum constitutes the year's profits for the 
company. 

Furthermore, as the number of insured persons increases, 
the actual number of cases of loss will be proportionately closer to 
the average number. If, then, the company that had 1000 
persons insured should increase that number to 100,000 persons, 
it could calculate the probable number of losses more closely. 

^ Besides an additional amount for the expenses of the company, which, 
for the sake of simplicity, is not included here. The subject is treated on 
pages 359, 360. 



356 INSURANCE 

As a further consequence, the premium demanded of each of the 
100,000 individuals might be reduced. 

We have supposed that 45 was the average number of cases 
of loss, and the probable variation 5, when the number of persons 
insured was 1000. If, now, the number of the insured has in- 
creased 100 times, i.e. to 100,000, the average number of losses 
among the 100,000 will increase 100 times, or to 4500 ; but the 
variations increase only 10 times, i.e. to 50, so that in any par- 
ticular 100,000 cases the losses might be 4550 or 4450. Such, 
we have seen, would be the variation of actual cases from the 
average, upon the increase of risks. Here the total amount of 
the loss, if 4550 of the insured 100,000 are affected, will be 
$22,750,000. The premiums must cover this sum. That they_ 
may do so, the 100,000 individuals must pay $227.50 each. 

The premium could be reduced to some such figure, but as a 
matter of fact it is not. It is to the advantage of an insurance 
company to keep the premium as high as possible, even when the 
number of policyholders has greatly increased. Thereby its 
profits will be increased, and the possibility of loss to the com- 
pany will be lessened. Unrestricted competition, if carried on 
in the matter of rate-cutting, would bring disaster to many exist- 
ing companies. Here large companies with great numbers of 
policyholders would have a decided advantage over smaller 
companies. Hence it is the aim of insurance companies to fix 
and adhere to a uniform premium rate. This is done by tacit 
agreement among the different companies or by the union of 
local or national companies into local or national organizations 
respectively. 

It may be that the actual occurrences of an event insured 
against may vary, in any given year, more than expected from 
the average occurrences established by the table of statistics, 
so that the payments may be more, that year, than the receipts ; 
but, as the operations of the company extend over many years, 
the yearly profits will in the long run counterbalance the yearly 
losses. It is to be noted, too, that any great increase in actual 
occurrences in a year will affect the table of average occurrences 



INSURANCE COMPANIES 357 

in the next yearly calculation of averages, and a rise in the aver- 
age would cause an increase in the premium for future policies. 

It will be readily understood that many other factors enter 
into the subject of insurance, making it much more complicated 
than it would here appear to be. The object of the preceding 
explanation has been merely to give a brief account of the eco- 
nomic aspect of insurance. 

Insurance business may be carried on by two kinds of com- 
panies: Joint-stock Companies and Mutual Companies. 

Joint-stock Companies. — A joint-stock company is formed 
by a number of capitalists, who subscribe a certain amount of 
capital and become shareholders in the company. The capital 
subscribed is a guarantee fund for the payment of losses suffered 
by the insured. The officers are chosen from among the share- 
holders, and they control the management of all business. The 
profits of the business go to the shareholders in the form of 
dividends. 

Mutual Companies. — A mutual company is composed of 
the persons insured, the policyholders. They elect the officers 
and have a voice in the management of the company either 
individually or by proxy. The funds requisite to pay losses 
are obtained by assessments on the members. After a time, 
however, a reserve fund is created from the premiums paid in, 
and this fund serves for the liquidation of liabilities. When 
profits arise from the business, they are distributed among the 
policyholders. 

Premium. — The premium is the sum paid by the insured to 
the insurance company. It is paid every quarter or half year, 
every year, or every three or five years, a reduction in the pre- 
mium being given for the greater length of time. 

Policy. — The policy is the written contract detailing the ap- 
plication of the person who is insured and the agreement of the 
company to insure him, with the various conditions under which 
the contract is entered upon. 

Reinsurance. — Reinsurance is the practice of many insur- 
ance companies of again insuring the risks they have accepted in 



358 INSURANCE 

some other insurance company. A reinsurance reserve fund 
is usually set aside for the purpose. There are certain insurance 
companies whose business is wholly restricted to reinsurance. 

Reinsurance distributes the danger of loss over a large terri- 
tory, and may be the means of safeguarding the financial standing 
of an insurance company at a period when the actual losses far 
exceed the average losses upon which the calculation of pre- 
miums has been made. 

Kinds of Insurance. — Insurance may be divided according 
to the object affected into Personal Insurance and Property 
Insurance. 

(i) Personal Insurance. — Personal insurance embraces: — 

Life Insurance, by which the payment of a certain amount is 
assured to a specified person upon the death of the person in- 
sured, or after the lapse of a specified time. 

Accident Insurance, by which the payment of a certain sum 
is assured when an accident befalls the insured. 

Health Insurance, by which a certain sum is assured to a 
person during sickness. 

Fidelity and Surety Insurance, which insures against dis- 
honesty on the part of employees and public officials, and against 
the failure of executors and administrators in the performance 
of their duties. 

(2) Property Insurance. — Property insurance embraces the 
following kinds : — 

Fire Insurance, against fire. 

Marine Insurance, against losses at sea. 

Transit Insurance, against loss of or damage to merchandise 
during transportation. 

Stock Insurance, against loss of live stock. 

Accident Insurance, which includes a great variety of kinds, 
insuring against accidents from hail, tornado, elevators, automo- 
biles, machinery, etc. ; against accidents that may happen to 
plate glass, boilers, etc. 

Credit Insurance, against losses from bad debts to which 
business men are liable. 



LIFE INSURANCE 359 

Employers' Liability Insurance, against claims for damages 
made against employers because of accidents suffered by em- 
ployees. 

Mortgage Insurance, which guarantees the validity of mort- 
gages. 

Some of the kinds of insurance mentioned above deserve 
special notice. 

Life Insurance. — Life insurance is carried on by joint-stock 
or mutual companies. 

Life insurance may be straight life insurance or it may be 
term insurance. The former embraces the whole period of a 
person's life ; the latter is limited to a certain definite number of 
years. 

Endowment insurance is a species of insurance by which a 
person is to receive a specified sum of money, if living at the 
expiration of a certain number of years. 

The premium in life insurance is determined from the Mortality 
Tables, which show the average number of deaths in a given 
number of persons of successive ages. These tables are made 
out usually from actual past experiences. 

The premium determined for one year by the calculation of the 
risk found in the tables less the year's interest is called a natural 
premium. 

In the case of term insurance covering a number of years, the 
premium is usually fixed at a uniform amount to be paid an- 
nually during the period in which the insurance is in force. This 
is known as the " level " annual premium. 

A life policy may be given for a limited number of annual 
payments of a fixed premium. Such a policy is a limited pay- 
ment pohcy, and the annual premium is fixed at a figure high 
enough to cover the risk of the company. 

When a person insured in a mutual company contracts not to 
participate in the surplus funds of the company and resigns all 
claim to dividends, his policy is called a non-participating policy, 
and his premium is fixed at a lower rate. 

The premium consists of two parts, the net premium and the 



360 INSURANCE 

loading. The net premium covers the average risk incurred; 
the loading is an additional amount intended to cover the possi- 
bility of the actual cases exceeding the average cases, but princi- 
pally to defray the expenses of the insurance company. 

Each person must pay his quota of the expenses incurred in the 
management of the business. These expenses are at times very 
great, frequently due among other things to the extravagant 
salaries paid the officers and to the great army of sohcitors who 
are employed by the companies and are paid large commissions. 
The average amount of the loading in all kinds of life pohcies 
is about 30 per cent of the net premium. 

An immense amount of Hfe insurance business is written in 
the course of a year. Thus, in 1919, the total number of new 
policies issued was 2,160,321, to the amount of $5,213,897,389. 
All these pohcies, however, are not permanent. Many of them 
cease through lapse. A policy is said to lapse when the policy- 
holder fails to pay a premium when due. 

Other policies cease through surrender. A policy is surren- 
dered when the policyholder returns his policy to the company 
and receives its surrender value. 

The number and the amount of policies that cease through 
lapse and surrender is very large. Thus, for the year ending 
Jan. I, 1920, in the New York hfe insurance companies, the 

Number of policies lapsed was 303,657, ^ Amount, $468,684,855 

Number surrendered was 131,420, Amount, $289,397,540 

(Insurance Yearbook, 1920, p. 282.) 

Gradually a large amount of money accumulates in the pos- 
session of an insurance company, from the premiums paid in, 
the policies that have lapsed, and the fact that deaths are fewer 
than estimated from the tables of statistics. This money forms a 
surplus and a reserve fund, out of which dividends are paid to the 
stockholders, in joint-stock companies, and to the policyholders, 
in mutual companies, and provision made for the payment of 
endowments and terminated policies. 

The surplus money of the company is invested in various 



FIRE INSURANCE 361 

ways, so that a large yearly income is received. Investments 
are made in government bonds, railroad bonds and stocks, and 
the stocks of various industrial concerns. Income is also derived 
from loans on mortgages, collateral, and policies. The larger 
the income derived by the company from these various sources, 
the lower need be the premiums demanded upon policies, and the 
higher may be the dividends paid out to the stockholders or 
policyholders. 

Fire Insurance. — Fire insurance companies are organized as 
joint-stock companies or as mutual companies. A person in- 
sured in a joint-stock company pays a definite premium and be- 
comes entitled to indemnity should he suffer a loss by fire. A 
person insured in a mutual company usually pays a cash pre- 
mium and is further liable to be assessed a certain amount to 
cover losses. 

Mutual companies are often formed embracing men engaged 
in some one line of business. In this way mills and factories 
are insured. 

A person or a corporation having a chain of houses or plants 
distributed over a wide extent of country may find it more 
economical to organize an insurance fund formed by contribu- 
tions from all the individual houses or plants, than to pay the 
large premiums required by insurance companies. 

A person who insures usually distributes his insurance among 
a number of companies. He will thus have stronger guarantee 
of recovering indemnity for any loss he may sustain. 

When a person insured suffers a partial loss by fire he will re- 
ceive indemnity to the full extent of the loss, if he has insured 
up to 80 per cent of the value of his property. If he has insured 
for less than 80 per cent he is considered to be a coinsurer with 
the company to the extent of the difference between his actual 
insurance and the 80 per cent. In case of partial loss by fire, 
he receives from the company but a percentage of indemnity 
proportional to the amount insured. 

Thus, if a man owning property worth $100,000 insures for 
$80,000, and pays the premium on that amount, and then suf- 



362 INSURANCE 

fers a fire loss to the property to the extent of $10,000, he will 
recover the full amount, $10,000, from the insurance company. 
If he insures the property for $40,000, he then, upon a fire loss 
of $10,000, will recover only $5000. Having insured only to 
the amount of $40,000, he is supposed to be a coinsurer of his 
own property to the sum of the other $40,000, and must pay 
half the indemnity for the loss. 

This 80 per cent coinsurance clause was adopted generally by 
the fire insurance companies in New York, New England, and 
many of the principal cities in other parts of the country from 
1892 to 1899. The clause, however, does not apply to dwell- 
ings and their contents. 

Fire insurance companies, to-day, have undertaken much 
in the way of preventive measures, so as to lessen the danger of 
fire or the loss attendant on fires. They have been able to in- 
duce many of the insured to adopt various precautions against 
fires, and through the fire patrols supported by them, they are 
able to diminish property loss considerably. 

The need of fire insurance may be gathered from the fact that 
the property loss from fires in the United States amounted, in 
1908, to $217,885,850; in 1909, to $188,705,150; in 1910, to 
$214,003,300; in 1911, to $217,004,575. During twenty-five 
years (1886-19 11), the property loss amounted to over 
$4,516,000,000. (Cf. Bulletin 418, Department of the Interior, 
19 10. Cf. Insurance Yearbook, 19 12, p. 461.) 

The premium in fire insurance depends on the risk that is 
assumed by the company. The risk depends on the value of 
the property insured, the time during which the insurance runs, 
the probability of fire in the class of property insured, and the 
probable destructiveness of the fire, if it occurs. All these fac- 
tors will determine the amount of the premium. Preventive 
measures undertaken spontaneously or at the suggestion of 
the company insuring will ordinarily lessen the amount of the 
premium. 

The probability of fire occurring in different kinds of property 
brings about a classification of property. The risk under this 



INDUSTRIAL INSURANCE 363 

head is not the same for all kinds of property. Classification 
is indeed necessary, but many owners of property object to the 
classifications sometimes made, because their property, though 
less exposed to the danger of fire, is classed with property more 
liable to the danger. The distribution of the burden of insur- 
ance thus unjustly affects the safer property. This alleged dis- 
crimination has led the owners of special kinds of property to 
adopt a means of mutual insurance among themselves. 

Fire insurance may indirectly be the cause of increasing the 
number of fires. This may be brought about by the greater 
carelessness engendered in the owners of property in guarding 
against fire, and even by furnishing an incentive to incendiarism 
in the hope of acquiring the insurance money. When property 
is insured to its full value or, especially, above its value, the 
incentive is all the greater. 

Industrial Insurance. — (i) Workingmen^s Insurance in Gen- 
eral. — Various systems for the relief of workingmen, in cases of 
accident, sickness, unemployment, old age, or death, have existed 
in the past, and exist to-day in the numerous workingmen's 
associations, trade unions, and benefit societies. 

The benefit system is widespread in the United States in local 
and national labor unions, railroad unions, and local industrial 
establishments. 

In several foreign countries, the government has insisted that 
the employers insure the life and limbs of the employees, and 
make provision for sickness and old age and unemployment. 
Such insurance in some form or other, and embracing different 
kinds of benefits varying in the different countries, is compulsory 
in Norway, Holland, Belgium (miners), Italy, Germany, Austria, 
France (miners). 

The principle that the care of the workingman under all the 
vicissitudes to which he is exposed in the performance of his labor 
— accident, sickness, unemployment, old age, death — should 
become an integral and necessary part of the cost of production, 
and should be borne by the industries in which the workingmen 
are employed, and not wholly by the workingmen, has been 



364 INSURANCE 

strongly insisted upon within the past quarter of a century, and 
has taken root in many foreign countries. 

Under the employer's liability laws of this country, damages 
for injury or death incurred in the course of w^ork can be ob- 
tained through a civil suit brought by an employee or his repre- 
sentative. The plaintiff must prove negligence on the part 
of the employer. The employer may plead in his own defense 
contributory negligence on the part of the employee, negligence 
of a fellow servant, or the deliberate assumption of risk by the 
employee when he engaged in the work. A change, however, 
is being gradually effected. In thirty-five states workmen's 
compensation laws have superseded the employer's liability laws. 

The compensation laws make obligatory the insurance by the 
employer of employees in certain hazardous occupations, and 
provide for automatic and practically immediate relief of the 
employee or his family in case of bodily injury or death. The 
amount of compensation to be paid in each case of injury is 
determined by a commission. The basis of compensation is 
the weekly wage received by the employee. A definite percent- 
age of the weekly wage is paid, and the number of weeks during 
which a person is entitled to compensation under the la.ws is 
determined by the nature and the gravity of the injury. The 
employer is, moreover, obliged to furnish at his own expense 
medical or surgical attendance to the injured employee during 
a specified period after the injury. The long delays and the 
expense of court proceedings hitherto imposed on the laborer 
are avoided, and the pleas admissible in the past and frequently 
sufficient to absolve the employer from all responsibility are no 
longer accepted. 

(2) Definition of Industrial Insurance. — Industrial insurance 
strictly so-called may be defined as ^' life insurance for small 
amounts, chiefly on the lives of wage earners and members of 
their immediate families, with premiums payable weekly and 
collected from the houses of the insured." (J. F. Dry den, 
Life Insurance and Other Subjects.) 

Life insurance is ordinarily limited to well-to-do persons. 



INDUSTRIAL INSURANCE 365 

who can afiford to pay the semiannual or annual premiums to 
the insurance companies. Such insurance is usually beyond 
the means of the poor. Efforts, however, have been made to 
bring the benefit of life insurance within the reach of the poorer 
classes. 

(3) Growth. — The Prudentiul Assurance Company of London 
was started for the benefit of the poor in 1854. The English 
government sought to extend the advantages of this kind of in- 
surance still further and established in 1864 a system of post- 
office life insurance. Every postmaster became an insurance 
agent. The system met with but very little success, and al- 
though it is still in existence comparatively few policies are issued. 

Industrial insurance was extensively taken up by private 
companies and has spread over the world. In 1909 there were 
about 58,000,000 industrial policies in force in the world. 

In the United States, the Prudential Friendly Society was 
started in 1875, and in 1877 was changed into the Prudential 
Insurance Company of America. The aim of the company at 
its inception was to provide against sickness, accidents, old age, 
and to insure a burial fund for adults and children. The busi- 
ness came in time to be limited to the insurance of a sum certain 
payable at death. In 1878 numerous other companies took up 
the business of industrial insurance, and it has grown immensely 
during the past thirty years. In 1919 the number of policies 
reached 45,319,318, amounting in value to $6,306,281,080. 
The policies written in 1919 amounted to $1,342,939,343. (Cf. 
Insurance Yearbook, 1920, p. 292.) 

(4) Advantages. — The economic advantages of industrial 
insurance are very great. It engenders a spirit of thrift and 
self-respect among the poorer classes. It diminishes the rate of 
pauperism and reduces the expenditure of the state for the hous- 
ing and the care of its helpless poor and their burial at death. 
It leads the way to ordinary life insurance, which opens up a 
means of saving and investing for persons of even small 
incomes. 

(5) Objections to the System. — There can be no doubt that 



366 INSURANCE 

industrial insurance is of immense economic and social impor- 
tance, but it is claimed by many that the system, as at present 
carried on, is decidedly evil and a means of robbing the poor. 
The defects of the system may be thus summarized : — 

1. The premium charged the workingman is nearly double 
that charged in ordinary life insurance. 

2. The benefit received by the industrially insured is but 
a fraction of that received for the same expense in ordinary life 
insurance. 

3. The benefit received is in many cases less in amount than 
the sum total of the premiums paid in. 

4. The great spread of industrial insurance is due to the agents, 
who by specious arguments and persuasion induce ignorant 
workingmen to insure in industrial insurance companies. In- 
deed, it might be claimed that the great spread of industrial 
insurance is an indication of the ignorance of the poorer classes 
and of the weakness of human nature, that allows itself to be 
cajoled by persuasive agents into giving proportionately large 
sums, under the guise of small weekly payments, for a corre- 
spondingly small return. 

5. The expense of maintaining the system of agents and col- 
lectors is great, and must ultimately be borne by the policy- 
holders. 

6. The rate of the lapsing of policies is high. Fifty per cent 
of the policies written lapse before the end of the first year. 
When a person insured allows four weeks to pass without pay- 
ment, he loses all he has previously paid in as premiums. 

(6) Answers to the Objections. — In refutation of the fore- 
going objections, the friends of the system advance the following 
points in its favor : — 

I. Industrial insurance is essentially for the very poor, for 
those who are not able to invest in ordinary life insurance. For 
them it is industrial insurance or no insurance at all. If there 
is any social or economic advantage at all in insurance, industrial 
insurance brings that advantage within the reach of persons who 
otherwise could never profit by insurance. 



INDUSTRIAL INSURANCE 367 

2. Industrial insurance is primarily to provide a sum certain 
in the case of death, for the payment of the cost of last sickness, 
burial, and cemetery plot. The insured are anxious to obtain 
provision of this nature and seek no other advantage from their 
insurance. 

3. Industrial insurance cannot be carried on without solicitors 
or collectors. Such is the improvidence and thoughtlessness of 
the class of people dealt with, that they will not of themselves 
take the thought and the trouble to pay in their weekly premiums. 
They need to be helped by the weekly visit of the agents. This 
fact was brought out in England when the post offices were 
made insurance institutions. The number of policies written 
by them was ridiculously small compared to the number written 
by private companies that employed the system of soliciting. 

4. Industrial insurance costs more than ordinary insurance, 
because the accommodation granted in industrial insurance is 
greater. The insured are saved all worry about payment of 
premiums, since the collector comes to their homes at the time 
of the receipt of their weekly income and collects the premium. 

5. Industrial insurance is installment insurance. The part 
payment plan in the case of all kinds of purchases supposes a 
higher price. 

6. The risk in industrial insurance is greater, because the 
workingmen insured are more exposed to dangers of accident 
and death, and this greater risk justifies the greater cost of 
industrial insurance. 

7. Lapses are a necessary element corresponding to the waste 
occurring in all forms of industry. They occur as well in ordi- 
nary life insurance. Efforts are constantly made by the industrial 
insurance companies to reduce the number of lapses. Moreover, 
the insured who allows his policy to lapse has had, w^hile he paid, 
the benefit of the insurance and the special accommodation in 
the method of paying his premiums. (Cf. J. F. Dryden, Life 
Insurance and Other Subjects, ch. IV.) 

(7) Remedy. — A remedy for the evils of industrial insurance 
was proposed and carried out in Massachusetts, in 1907. A 



368 INSURANCE 

law was enacted permitting savings banks to establish depart- 
ments for the issue of life insurance and annuities. 
The forms of policies issued are : — 

1. Straight life policy, in which premiums cease at the age of 

75- 

2. Endowment policy, maturing at age 65. 

3. Endowment policy, maturing in 20 years. 

4. Insurance and annuity policy. 

5. Old age pension policies. 

The maximum life insurance that may be taken by a person 
in any one bank is $500, and the maximum annuity $200, but 
policies may be taken by a person in two or more banks. (Re- 
port of Commissioner Labor, 1908.) 

It is thought that savings banks, already fully equipped as 
they are, can manage the insurance business without the outlay 
of expenditure incidental to the present system. The house-to- 
house collection of premiums is dispensed with, eliminating the 
expense due to the collecting system. The advantages of in- 
surance will be perceived by the working classes without the 
need of persistent persuasion on the part of agents, when they 
recognize the safety of their investment and the low price at 
which they can obtain such advantages. (Cf. L. D. Brandeis, 
Savings Insurance.) 

QUESTIONS 

1. What is insurance? Give a short historical account of insurance. 

2. What is the extent of insurance business to-day? 

3. Explain by example the economic advantage of insurance. 

4. Give the theory of insurance. 

5. What is a joint-stock company? A mutual company? Define pre- 

mium; policy; reinsurance. 

6. What are the different kinds of insurance ? What kinds of insurance 

come under personal insurance ? What under property insurance ? 

7. Explain under life insurance what is m.eant by straight life insurance; 

term insurance; endowment insurance. How is the premium de- 
termined in life insurance ? 
S. What is a Hmited-payment pohcy? A non-participating policy? 
Describe what is meant by loading. 



QUESTIONS 369 

9. When does a policy lapse ? When is it surrendered ? What becomes 
of the sums of money accumulated by an insurance company? 

10. Explain joint-stock and mutual fire insurance companies. 

11. Explain coinsurance. 

12. How is the premium in fire insurance determined? 

13. Give a general account of workingmen's insurance. 

14. What is industrial insurance ? Describe its growth in the United 

States. 

15. What are the advantages of industrial insurance? 

16. State some of the objections made against industrial insurance as 

carried on to-day. 

17. x^nswer the objections. 

18. What remedy has been adopted in Massachusetts against the alleged 

evils of the present system of industrial insurance ? 



POT. ECON. — 24 



CHAPTER XX 

CONSUMPTION. SPENDING. SAVING. INVESTING. 

POVERTY 

I. Consumption 

Definition. — Consumption is the second division of Political 
Economy. Consumption is defined as the use which man 
makes of riches for the obtaining of his needs. (Gide, Principles 
of Political Economy.) Again: " Economic consumption is 
the enjoyment of the utilities which wealth is capable of offering." 
(Fetter, The Principles of Economics.) 

Kinds of Consumption. — Consumption is public when car- 
ried on by the state. Its results are seen in the educational 
establishments, the hospitals, the sanatoria, the parks, erected 
and constructed at public expense. Consumption is private 
when carried on by private individuals in the satisfaction of 
their own wants. 

Consumption is sometimes divided into Productive and Non- 
productive. Productive consumption occurs when the objects 
are used so that they may serve to produce more wealth. This 
is not consumption in our present sense. It occurs in actual 
production. Non-productive consumption occurs when the ob- 
jects satisfy a want, without reference to the fact that they are 
or are not destroyed. This is the final term of production. 

Explanation. — Consumption is not necessarily destruction. 
There may be destruction, as in the case of food and fuel. There 
may be but gradual destruction, as in clothes, furniture, houses, 
etc. There may be no destruction from wear, as in a statue or a 
painting. 

Consumption is the ultimate aim of production. There are 
some who conceive production of wealth to be an end, and who 
would make the consumer but a part of the mechanism the 

370 



EXPLANATION 371 

object of which is the production of wealth. This view is prev- 
alent to-day. 

The betterment of society as a whole, the betterrfient of the 
individuals who compose society, should be the aim of all pro- 
ductive effort. Yet in the present state of things, a great por- 
tion of society is in misery. Thirty per cent of the population 
of England are in poverty, i.e. have not wherewith to procure 
the necessaries of life. In America, perhaps fifteen or twenty- 
five per cent are in the same condition. 

In the consumption of goods, man seeks the satisfaction of 
three orders of wants: those which relate to the necessaries of 
life; those which relate to the decencies or comforts of life; 
those which relate to luxuries. The rational man, in the con- 
sumption of goods, should seek to gratify his wants in the fore- 
going order. Morality requires the same order. As a matter 
of fact, impulse, habit, or fashion determines very often the 
actions of men in this matter. 

Consumption has naturally a great influence on production. 
It constitutes the term " demand," while the product is the 
" supply." To bring about equilibrium between the demand 
and the supply is the great aim of production. The consumers 
ultimately determine the nature and the amount of production. 
They can restrict the production of a commodity if they limit 
their demand for it ; they can stop its production wholly if 
they cease to demand it. 

Thus the consumers have it in their power to determine what 
shall be the nature and what the quality of production. The 
Consumers' League, for example, is an organization composed 
of members who bind themselves to buy no article which has 
not on it a printed guarantee that the article has been made 
under just and sanitary conditions. 

It follows from this that the criminality of those producers 
who turn out products, books, pictures, so-called works of art, 
that offend against justice, religion, and morality is participated 
in by those consumers whose demand alone for such products 
creates for them a profitable market. 



372 



SPENDING 



Subjects discussed under Consumption. — Under consumption 
come the three subjects: Expenditure or Spending, Saving, and 
Investing. , After discussing these subjects, a short study will be 
made of Poverty and its remedies. 



II. Spending 

Spending here means the giving away of money for objects 
which serve for our personal consumption. It does not mean 
buying raw material for manufacture, nor does it mean paying 
wages. 

Spending should steer a midway course between prodigality 
and avarice. Each person should determine how much he needs 
for his real wants and those of persons depending on him, and 
how much he may devote to spending. A certain amount of 
recreation and pleasure is allowable. If guided by reason and 
morality, expenditure will be directed to the procuring of those 
things which will further the perfection of the individual. The 
individual's perfection will embrace the complete development 
of heart, mind, and body. This rule will apply to public ex- 
penditure as well as to private. 

Spending that gives money to more productive industries is 
economically the better kind of spending. 

Means of reducing Expenditure. — Several means are re- 
sorted to for the purpose of reducing expenditure. Some of the 
principal methods are as follows : — 

(i) Living in Common. — There is no doubt that the expense 
of living is increased immensely by each family living by itself. 
There are the separate individual expenses for house, servants, 
cooking utensils, etc. If several families live together in one 
house and have servants in common, a common dining room, 
and meals in common, there must necessarily be a great saving 
in expenditure. This idea has appealed to Americans as to no 
other people, and hence the prevalence in this country of the 
practice of living in hotels and apartment houses where servants 



LUXURY 373 

are common to all and where meals are taken in one common 
dining room. 

In this system of living thus in common, there is indeed a 
curtailing of expenses, but there is the danger of destroying 
family life, the charm and sanctity of the home, and all the bene- 
ficial influences for the moral education of the young that center 
around the exclusive hearth. 

(2) Cooperative , Associations. — These have for their object 
the establishment of cooperative stores throughout the coun- 
try, with capital furnished by the associates, where necessaries 
and other commodities may be bought at cost or at prices 
slightly above cost. Goods are bought by the stores at wholesale, 
and thus a saving is made. If there are profits, they are dis- 
tributed among those who have contributed the capital. 

Cooperative associations are established in great numbers 
in England and they do an enormous amount of business. 

(3) Building Associations. — Such associations were first 
established in Philadelphia in 1 83 5 . They have increased rapidly 
in the United States, until to-day they do a business approximat- 
ing $600,000,000. Stock is issued to be paid for in small monthly 
installments. Only stockholders can borrow from the associa- 
tion. The association advances the money required for the 
building of houses, securing itself by taking mortgages on the 
houses and the land on which they are built. The borrower 
pays his installments, which are the equivalent of rent, and 
after ten or twelve years, he will have paid up the loan ad- 
vanced him. 

These associations furnish a ready means of supplying the 
money for house building and are a great inducement to the 
poorer classes to secure their own homes. 

Luxury. — Closely connected with the question of spending 
is the subject of Luxury. 

• Luxury is defined as " the unreasonable use of things rare and 
costly" (Antoine, Cours d' economic sociale, p. 670), or, again, 
" the gratification of a superfluous want." (Gide, Principles of 
Political Economy, p. 637.) 



374 



SAVING 



Luxury is relative. It depends on times, places, and persons. 
Some things that were luxuries one hundred years ago have 
to-day become the mere necessaries of life. What would be a 
luxury for a poor man may be even necessary for a wealthy man. 

Economists are divided on the subject of luxury. Some com- 
mend it. Others, more reasonably, condemn it. The reasons 
for condemning it are : — 

1. It makes one selfish and diminishes one's sympathy for the 
poor and suffering. 

2. It engenders greed and the desire for riches. 

3. It dissipates capital which might aid in production. 

4. It is contrary to the natural law. 

Luxury is wastefulness and to be condemned for other reasons 
besides the extravagant expenditure of money, when it is a waste 
of labor, the labor being directed not to essentials, but to trifles ; 
when it is procured by grinding poor laborers; when it is in- 
dulged in for mere vain display ; when it hinders production (wit- 
ness the extensive parks of English landowners) ; when it causes 
degenerates and classes. 

III. Saving 

Saving means the laying aside of money saved from con- 
sumption. Saving is not practiced by savage tribes. It is 
the result of education and civilization, of forethought which 
looks into the future and esteems a future advantage or gain 
to be worth the present sacrifice. Saving means always a sacri- 
fice of some kind. 

Conditions for Saving. — The conditions for saving are: 

1. One must have something over and above one's daily ex- 
penses. It is hard for the poor to save. Still, very often even 
they can save, if they restrict the expenditures they make for 
useless or injurious things. 

2. There must be the will to save. This condition is most 
frequently wanting, especially among the great mass of the 
poorer classes. These live wholly in the present, are incapable 



INSTITUTIONS FOR SAVING 375 

of projecting their thoughts into the future, and hence have no 
strong motive for imposing on themselves the present sacrifice 
that saving entails. Education can do much in this matter. 
Institutions for Saving. — There are various institutions for 
saving, such as the state savings banks, the postal savings banks, 
cooperative societies, building associations, industrial insurance. 
Those here mentioned have been already dwelt upon. 

IV. Investing 

Investing is a mode of production. It adds to the wealth 
of a country. An investment may be made by the holder of 
money by lending it out to others who carry on production, or 
by his taking an actual part in production. 

Ways of Investing. — The principal ways of investing are in 
Loans and in Business. 

(i) Loans. — Money may be loaned to others who wish to 
engage in business. A certain rate of interest is charged. Se- 
curity is exacted, and the security may take various forms' — 
a promissory note, a mortgage, or a claim on future salary. 
Again, money may be invested in government bonds. Such 
an investment is practically a loan to the government, the se- 
curity being the government bonds, which pay a certain rate 
of interest yearly and are redeemable at a certain future date. 
Money may be invested in railroad bonds. Here a loan is made 
to the railroads, the security being the bonds of the railroads. 

(2) Business. — Money may be invested in business, as real 
estate, commerce, farming, productive industries ; or, if one does 
not personally enter business, he may invest in the stocks of the 
numerous industrial concerns already engaged in business. 
These stocks pay a dividend to the stockholders at stated peri- 
ods. One has but to glance over the financial page of the daily 
paper to see the list of large business concerns in which money 
may be profitably invested. 

In all this matter of investing, it must be borne in mind that 
the money invested is consumed by the different concerns in 



376 INVESTING 

which it is invested, and herein consists the difference between 
hoarding and investing. Again, invested money when loaned 
is spent not by the person to whom the money belongs, but by 
the persons to whom the money is loaned, and herein consists 
the difference between investing in loans and spending. 

Conditions for Investing. — There are two conditions for 
investing, — the Security and the Profits. 

(i) Security. — A prudent man will not invest his money either 
in loans or in business unless he has some assurance that he will 
get back not only the same amount of money, but also a surplus 
in the form of interest, which will pay him for the risk he runs 
in the investment. He must have security of three kinds, — 
Political, Legal, and Moral. 

Political security is security against revolutions in govern- 
ment, change of dynasty, change of governmental methods in 
dealing with finance, against oppressive government methods, 
against foreign embroilments which may result in war. When 
this political security is destroyed or notably disturbed, new 
investments cease, and, if possible without great loss, the exist- 
ing investments are withdrawn. Some years ago the dread of 
internal disturbances in Russia had the effect of curtailing in- 
vestments in Russian bonds. In all countries rumors of war 
will have a very perceptible influence on investments. The 
fear of a change from the gold to a bimetallic standard in 1893 
caused the withdrawal of foreign money invested in American 
securities. 

Legal security is sufficient guarantee that the investor's 
rights over his invested capital will be safeguarded by the laws, 
and by those who administer the laws. 

Moral security depends on a public morality, a business 
honesty, a fidelity in keeping engagements, without which all 
business intercourse must come to an end. 

(2) Profits. — The second condition for investing is the reaping 
of some monetary profit from the investment. If nothing were 
to be gained by putting out one's money in loans and business 
transactions, money would not be so put out ; it would be 



EXPLANATION OF POVERTY 



377 



hoarded. But the fact that a definite return in the form of 
interest is made for each dollar invested makes the investment 
at once profitable and desirable. 

The ways open for profitable investment are innumerable. 
There are, as already mentioned, government bonds, railroad 
bonds, the shares of industrial concerns. Promoters on every 
side are constantly making enticing offers of large returns for 
capital invested in patents, new industries, mines, and business 
enterprises. Caution, however, is needed in accepting such 
offers. Close investigation should be made before intrusting 
one's often hard-earned capital to the ventures that are adver- 
tised. It is a safe view to hold that the higher the interest and 
the more easy and assured the returns, the greater is the risk 
for the investor. Where one seeks absolute safety, one must 
be content with small profits. 

V. Poverty 

Much is being done to-day in the study of poverty, in the 
investigation of its causes, and the search for remedies. It will 
be well to look into the question, both for the sake of its eco- 
nomic importance and to learn how it is treated by economic 
writers. 

Explanation of Poverty. — Poverty may be Absolute or Rela- 
tive. It is absolute when the income is insufficient to obtain the 
bare necessaries of life. It is relative when the income is 
sufficient indeed to obtain the bare necessaries of life, but in- 
sufficient to secure the ordinary comforts suitable to even the 
lowest orders of civilized society. 

Poverty depends on the relation between income and cost of 
living. The fundamental items of expense are food, shelter, 
clothing. 

Statisticians in Germany and more recently in the United 
States (in the Bureau of Labor) have conducted elaborate in- 
vestigations in this matter, to find out the relation between in- 
come and the several items of expenditure. Thousands of 



378 POVERTY 

families have been taken for study, and the German statistician, 
Engel, has been enabled to draw the following conclusions : — 

1. The greater the income, the smaller the percentage of out- 
lay for subsistence. 

2. The percentage of outlay for clothing is approximately 
the same whatever the income. This is not confirmed in Amer- 
ica, where the more the income, the greater the percentage of 
outlay for clothing. 

3. The percentage for lodging or rent, fuel, and lighting, is 
approximately the same in all classes. In America it is the 
same for rent, but not for fuel. The greater the income, the 
smaller is the percentage of expenditure for fuel. 

4. The percentage for outlay for sundries increases with the 
amount of income. 

Booth {Life and Labour of the People in London) ^ as a result 
of his studies in the economic and social conditions of London, 
found that 30 per cent of the London population were living 
in poverty. These were poorly sheltered, insufficiently clothed, 
and underfed. 

The results of such a state of things are directly manifested in 
a higher death average, increased infant mortality, inferiority 
in the physical condition of the race ; the results are indirectly 
shown in industrial inefficiency of the laborers, degradation of 
the national character, and hindrance to moral development. 

Statistics are wanting in the United States for any similar 
study. But in general it may be said that the conditions are 
better here than abroad. Still, if even 15 per cent of the popu- 
lation of the United States are within the limits of poverty, this 
shows the inability of present methods of civilization to procure 
the well-being of the elements composing society. 

Causes of Poverty. — Among the causes of poverty are named 
generally, intemperance, habitual indolence, sensuality, gam- 
bling, ignorance, shiftlessness, improvidence. Yet permanent 
poverty cannot be ascribed to these causes alone, for they are 
usually found in conjunction with general social causes. 

Heredity plays a great part in bringing about poverty, and in 



REMEDIES FOR POVERTY 



379 



many cases poverty may be the result of misfortunes, for which 
the poor may be in no wise deserving of blame. 

In one investigation in an English town, the following were 
found to be the causes of poverty : — 

% 

Death of chief wage earner 15-63 

Illness or old age of same 5.1 1 

Irregularity of work 5.14 

Size of family 22.16 

Regular but insufficient wages 51-96 

We find no single reason given as the cause of poverty. Each 
one will give that cause which touches most nearly the doctrine 
he upholds. The Malthusian will attribute it to overpopula- 
tion ; the anarchist to government ; the currency reformer to 
the money system. But poverty existed even when none of 
these causes was predominant. 

Remedies for Poverty. — Attempts have been made and are 
being made both to relieve poverty and to prevent it ; the relief 
is palliative and curative. 

These attempts take the form of Private and Public help. 

Private help is Individual or Institutional. Private individual 
help is generally decried as being usually ill-advised and as per- 
petuating rather than relieving pauperism. Private institu- 
tional relief has brought into existence the numerous organiza- 
tions and societies which conduct relief in a determinate and 
definite manner. Such modern institutions are '' private hos- 
pitals, dispensaries, sanatoria, antituberculosis leagues, im- 
proved dwellings and model lodging-house companies, orphan 
asylums, creches, kindergartens, juvenile homes, fresh-air funds, 
retreats for the aged, the convalescent, and the incurable, 
provident loan societies, employment agencies, wood yards 
and laundries, industrial colonies, legal aid societies, peoples' 
palaces, and the like." (Seligman, Principles of Economics, 
p. 592.) 

Public relief is given in England through the Poor Law system. 
In 1 60 1 assessments were made by law for the poor. In 1722 



380 POVERTY 

workhouses were built and the poor who would obtain relief 
were obliged to enter them. By the laws of 1782 and 1796, 
outdoor w^ork was to be found by the government authorities 
for the poor. In 1834 outdoor relief was abohshed. 

In the United States the main public relief consists in the 
almshouses and in some cases in outdoor relief. Immigration 
laws strive to prevent the introduction into the country of the 
indigent who may become public charges. 

Is there an adequate remedy against poverty? Is it possible 
to bring about a state of society where there will exist no poverty 
and no misery? It is hard to conceive such a state, when one 
takes account of human frailty, of the mental, moral, and phys- 
ical inequalities among men, of the fall of the race, of the saying 
of the Master of all that the poor we shall have always with us, 
of the future life, of which the present is but a forerunner and a 
preparation. 

Poverty may be relieved in great measure and done away with 
in great part by leveling up all the grades of society, by charity 
and justice among men. 

Relief of the Unemployed. — It will be found that those who 
are unable to provide the means of livelihood for themselves, the 
unemployed, are made up of the following classes : — 

1. Those who are physically unable to work. 

2. Those who are unwilling to work (the vast majority of 
criminals are found in this class). 

3. Those who are unable to get work. 

With regard to the first class, the family should support those 
of its members who through sickness or injury are unable to 
provide for themselves. If the family is unable to do so, it 
becomes the duty of the state to support them. 

Preventive means to do away with the idleness of the second 
class should be taken by the state. If this be neglected, and the 
members of this class become criminals, the state will then be 
forced to provide jails, penitentiaries, prisons for their detention, 
to educate them into usefulness, and to provide sustenance for 
them during the process of such education. The cost of provid- 



RELIEF OF THE UNEMPLOYED 381 

ing for the criminal class is enormous, and it would be wise 
economy for the state to reduce the number of criminals by en- 
couraging the institution of industrial schools, where the poorer 
classes may be able to acquire a useful trade, through which they 
may become self-supporting. 

The third class, those who are willing and able to work, but who 
cannot find work, presents a serious difficulty. Some few years 
ago thousands of Englishmen besieged the English Parliament, 
clamoring for work and the means to earn a livelihood for them- 
selves and families. In March of the year 1908 an army of un- 
employed paraded the streets of New York to make public pro- 
test of their willingness to work and of the inadequacy of the 
present social system to supply the means of living to men de- 
sirous of every and any kind of occupation that would enable 
them to ward off starvation. Coxie's army of unemployed in- 
vaded Washington, in 1894, with a similar purpose. In times 
of business depression such occurrences are likely to happen. 
In times of prosperity there is usually ample demand for all the 
labor on the market. 

It may be asked how far the government is obliged to come 
to the aid of this third class of unemployed. Is the government 
obliged to furnish them employment? If it does not furnish 
them employment, is it obliged to give the necessaries of life 
to this class? 

No doubt the state must aid in cases of extreme need and 
prevent the starvation of its members, but it is a dangerous 
thing to lead the mass of the people to rely on the government 
to provide for its necessities. It has come to be received as an . 
axiom that " the number of dependents tends to increase in 
direct ratio to the aid they count upon receiving." Once the 
government begins to inaugurate measures for public relief, there 
grows up among the people a feeling of dependence and reliance 
on government ; the spirit of self-dependence and self-reliance 
is destroyed ; a premium is placed on improvidence ; the de- 
pendent classes gradually increase and look to government aid 
in every species of necessity; and, finally, the productive, en- 



382 POVERTY 

ergetic, active classes of society are made to bear the burden 
of supporting the improvident. 

Negative and preventive measures are better than direct aid. 
The government should by prudent legislation correct the evils 
existing in the social system, — business combinations, monetary 
methods, etc., — which are the direct or indirect causes of busi- 
ness depression and the forced idleness of the masses ; it should 
offer every encouragement to provident and resourceful efforts 
on the part of the working classes to secure means to tide over 
periods of nonemployment ; it should offer facilities for the 
increase of savings institutions, such as postal savings banks, 
building associations, and industrial insurance companies; it 
should lend its sanction to organizations among the masses for 
beneficial purposes, so that the working classes may have some- 
thing to live on during times of idleness ; it should introduce 
compulsory insurance of employees by employers. 

These and similar measures would tend to prevent the evil 
of poverty and helplessness in which at times the laboring classes 
are thrown, and would at the same time obviate the sinister 
effects of paternalism. 

QUESTIONS 

1. What is consumption ? How is it divided? 

2. What relation exists between consumption and production? 

3. What is spending ? What principles should influence spending ? 

4. What means are suggested to reduce expenditure ? Explain each of the 

means proposed. 

5. What is luxury ? Why should it be condemned ? 

6. What is saving ? What are the conditions for saving ? Give examples. 

7. What are the principal ways of investing? Mention and explain the 

conditions for investing. 

8. What is poverty? What are the causes of poverty? What remedies 

for poverty are proposed ? 

9. What is the nature of the relief that should be extended to the different 

classes of the unemployed ? 



CHAPTER XXI 
DISTRIBUTION. RENT. INTEREST 

I. Distribution 

Explanation. — Distribution is the third part of Political Econ- 
omy. The object of this part of Political Economy is to study 
the principles that determine how the product of Nature, Labcr, 
and Capital, or its equivalent in money value, is to be distributed 
among the various agents which help in its creation. 

An immense amount of concrete product is the result of the 
various forces, Nature, Labor, Capital, treated of in the first 
part of Political Economy, Production. This product has 
value estimated in money. The purpose now is to consider how 
the product shall be distributed, what share of it shall come to 
the individual factors which have, by collective energy, helped 
in its production. 

This subject constitutes the great social question. 

That there is a social question at all is denied by writers of 
the Liberal School, who hold that if everything is left absolutely 
alone, matters will settle themselves according to strict justice 
and according to the infallible operation of laws as inflexible 
and as certain of result as are the laws of nature. They say 
that there should be no attempt to determine methods of dis- 
tribution, and that it is idle to speculate on how distribution 
shall be accomplished. How commodities may be produced, 
how they can be produced at least cost, and how placed where 
they may bring in the greatest returns, these are questions which 
properly come under the investigation of PoHtical Economy, but 
PoHtical Economy should go no further. The proceeds from 
the produce, they claim, will distribute themselves naturally, just 

383 



384 DISTRIBUTION 

as the waters of a river, debouching into a plain, will find their own 
level and will contrive their own exits. So, Adam Smith did 
not treat of distribution at all, limiting his study to production 
alone. 

Yet the question of distribution has in recent years come to 
be considered a practical question. It is, according to most 
writers, the great social question upon the solution of which 
depends the welfare of the individual members of society. 
It is claimed that, while production is increasing year by year 
and the world is annually becoming richer, the social standing 
of most of the members of society is not becoming appreciably 
better, or at least not in proportion to the increase of wealth. 

The evil is not in methods of production, but in the methods 
of distribution of the immense wealth brought into existence by 
production. 

The amassing of great wealth, it is declared, is due to causes 
often unjust and tyrannical. They are thus enumerated : 
the sword, slave trade, political power, foreign trade, inventions, 
mercantile skill, monopolies, enterprise in real estate, gambling, 
immense charges for professional services, extortion in trade, 
usury. Through such causes, many of them unjust, wealth 
has been concentrated in the hands of the comparatively few, 
and the great majority of the people are left outside the reach 
of the benefits that accrue from an ever increasing quantity of 
production and an ever advancing facility in the means of pro- 
duction. 

From the unequal distribution of the wealth produced have 
arisen the diversity of classes in society, one antagonistic to 
another, and the inequality of social conditions. 

So has it been in the past, and so is it to-day. In ancient 
Greece, there were the helots and the upper classes ; in Rome, 
there were the patricians, the plebeians, and the slaves ; in the 
Middle Ages, there were the feudal lords and the serfs. In 
Russia, what abject degradation still obtains ! In Europe, 
to-day, there exist the nobility and the populace. In our 
own land, we have the rich and the poor. 



THE CATHOLIC VIEW 385 

All this inequality, this distinction of classes, it is claimed, 
is due to the unequal and frequently unjust distribution of 
wealth. 

Much is said about the equality of men. We hear from many 
quarters the saying : " All men are by nature equal ; " and we are 
told to believe that any difference of social condition, any super- 
eminence in ability or in the possession of the world's goods, 
violates this fundamental principle of the natural equality of 
men, and must have arisen from social or personal causes neces- 
sarily unjust. 

The Catholic View. — We must not, however, fail to keep in 
mind the fundamental principles of Catholic doctrine, which 
directly or indirectly pertain to this matter. 
. It is true that, according to nature taken in the abstract, all 
men are equal, i.e. all men have the same nature. All have the 
same Creator, the same destiny and end, the same natural law. 
All are members of the same family. All have the same essential 
rights and duties arising from the natural law. All have the 
right to be treated as men. All have a right to the essential 
conditions of existence, that is, the right to acquire food, rai- 
ment, lodging, to possess property, to dispose of their possessions 
and services as they please, provided they offend in no way 
against the rights of others. 

But it cannot rightly be claimed that in the concrete all men 
are by nature equal. Men differ in physical and mental powers, 
in qualities inherited and acquired through education and under 
influence of environment, in judgment of things, in that ability 
which makes for success in the world, in the fortunate surround- 
ings which apparently through mere chance affect their lives, 
and in the power to turn their surroundings to good account. 
The causes being so varied, the results must be equally varied, 
and there will always be the remarkably successful man along- 
side of the man who wins success but in small measure and 
after much labor, and the man who seems fated to absolute 
failure. 

Nor do these varieties of inherent abilities, nor the social 

POL. ECON. 25 



386 DISTRIBUTION 

differences due to them and to fortuitous circumstances ably 
profited by, militate against the only true kind of natural 
equality that can be asserted of all men, — equality in the ab- 
stract. Had nature intended that all men should be equal in 
the concrete, nature would have given to all men equally the 
same health, the same natural dispositions, the same mental 
abilities, the same tenacity of purpose, the same moral qual- 
ities. 

Moreover, man is in a fallen state. He had been raised to a 
supernatural order, and through the sin of the first parents, he 
has fallen from his high estate and has become subject to death, 
to suffering, to misery, and to labor. This is no mere specula- 
tion. It is the truth made known to us by Revelation. Man's 
life on this earth is short. He is destined to a future life, to a 
life eternal. This present life is not the be-all and the end-all 
of man. Another era will open up to him, and that era will 
bring about the perfection of his being, which cannot be gained 
in this life. 

Hence, evils may exist in this world, injustice and oppression 
may go on, and the equilibration of things may never take place 
here ; the wicked may prosper and the honest and the just may 
be oppressed, and no adequate remedy may appear ; yet the 
moment of compensation, of perfect justice, will come, if not 
in this life, then in the life of eternity. 

The efforts that are being exerted to correct the patent evils 
of society are being made usually without any consideration of 
these absolutely certain truths. Theories are advanced, systems 
are proposed, for the amehoration of mankind, in the false 
assumption that the supernatural does not exist, that man has 
within himself all that is needed for his own perfectibility, that 
this world is the final term of man's being. 

These theories ignore the fall of man, the supernatural order 
to which man has been raised, the supernatural means requisite 
under the present order, the Providence of God, the future life 
where a final settlement must be made. 

The efforts being exerted by all such theorizers for the better- 



SOCIALIST SOLUTION OF THE PROBLEM 387 

ment of man must infallibly prove abortive, because, building 
upon false assumptions, they ignore the fundamental truths of 
the human race and world conditions. 

No doubt much has been done and much more can be done 
for the relief of existing evils through natural efforts and with 
natural means, but to hope to attain by such means alone perfect 
happiness for all men in this life is a vain chimera, and must be so, 
if Revelation is not a myth. 

It would be well for us to hearken to the words of Leo XIII : 
" To suffer and to endure is the lot of humanity ; let them 
strive as they may, no strength and no artifice will ever succeed 
in banishing from human life the ills and troubles which beset it. 
If any there are who pretend differently — who hold out to a 
hard-pressed people the boon of freedom from pain and trouble, 
an undisturbed repose, and constant enjoyment — they delude 
the people and impose upon them, and their lying promises 
will only one day bring forth evils worse than the present." 
(Encycl. Rerum Novariim.) 

Socialist Solution of the Problem of Distribution. — In 
treating of Socialism in a preceding page, the reader was referred 
to this third part of Economics for a view of the methods of 
distribution advocated by the Socialists. It is well to give at 
least a cursory glance at the principal views which have been 
set forth at various times by Socialist teachers. (Cf. Gide, 
Principles of Political Economy, p. 454; Cathrein-Gettelmann, 
Socialism, p. 316.) 

The principles which, according to Socialists, should gov- 
ern distribution may all be summed up in the following 
formulas : — 

(i) Every one should receive an equal share of the social 
product. (2) Every one should receive according to his wants. 
(3) Every one should receive according to his merits or capac- 
ities. (4) Every one should receive according to his labor. 

(i) Equal Sharing. — '' Every one should receive an equal 
share of the social product." Equal sharing was practiced 
among some ancient societies. The Romans divided the land, 



388 DISTRIBUTION 

giving an equal share to each family, and when inequality in 
possessions supervened, another division was made. But it 
must be noticed that in those ancient times the principal item 
of wealth was land. To-day land constitutes but a fraction of 
the wealth owned by individuals in society. If land were the 
only item of wealth, equal sharing might to-day be possible, 
from a mere physical point of view, but with wealth made up 
of countless other items as it is to-day, the problem of distri- 
bution by equal sharing becomes an impossibility. 

The principles upon which the Socialists found their claim to 
equal sharing are : — 

1 . There is. enough wealth in the world to satisfy the wants of 
all the members of society. 

2. Whatever wealth has been amassed has been so amassed 
owing to the beneficent conditions arising from the mechanism 
of society. But each individual of society has been instrumental 
in establishing and preserving these conditions. The individuals, 
therefore, ought all to share in the general good — the wealth 
amassed in society. 

3. The fact that unequal possession of the wealth of society 
exists is due to no natural causes, but to causes wholly artificial, 
to spoliation of the poor by the rich. Equilibrium must be re- 
established by expropriation, according to the revolutionary 
Socialists, by progressive taxation, according to the more mod- 
erate element. 

As a matter of fact, the rich constitute in all countries but a 
small minority of the whole people. In the United States, ac- 
' cording to Thos. G. Shearman, — 

1.4 per cent of the population own 70 per cent of the wealth, 

9.2 per cent of the population own 12 per cent of the wealth, 

89.4 per cent of the population own 18 per cent of the wealth. 

According to Holmes, an expert, — 

0.03 per cent of the population own 20 per cent of the wealth, 

8.97 per cent of the population own 51 per cent of the wealth, 

91.00 per cent of the population own 29 per cent of the wealth. 



SOCIALIST SOLUTION OF THE PROBLEM 389 

In the British Isles six million families, or over three fourths 
of the people of Great Britain and Ireland, have no registered 
property. 

It may be well to consider what would actually be the result 
if equal sharing were put in practice. 

If, for illustration, we take the census valuation of real and 
personal property in the United States for 1890, we find that the 
total wealth equaled $65,000,000,000, of which the following 
were the most important items : — 

Real estate, with improvements $35,000,000,000 

Live stock on farms, farm implements, and machinery . 2,700,000,000 

Mines and quarries and stock on hand 1,300,000,000 

Gold and silver coin and bullion 1,100,000,000 

Machinery in mills and product on hand 3,000,000,000 

Railroads and equipments and street railways .... 9,700,000,000 

Telegraph, telephone, shipping, and canals 700,000,000 

Divide this total amount by the population of 1890, and the 
per capita wealth v/ill be $1038. Each family (average at that 
time = 4.8 persons) would have for its share $4982, if the national 
wealth were equally distributed to families in 1890. Of this 
amount, $2683 would be in real estate, and $84 in coin. 

Again, in 1890, the national income was $10,800,000,000, 
which would give $172 to each member of society, or $827 to 
each family. 

The per capita wealth of France in 1890 was $1025. In other 
countries, in 1895, according to R. E. May: — 



United Kingdom 

Germany . . . 

Russia . . . . 

Austria . . . . 

Italy . . . . 

Spain . . . . 

Australia . . . 



Wealth 

PER CAP. 



$1,548 

799 
313 
533 
518 
692 
1,312 



Income 

PER CAP. 



$184 
126 

49 
85 
71 
79 
262 



390 DISTRIBUTION 

With equal distribution, therefore, many famiUes and indi- 
viduals would be better off than they are at present. But such 
a scheme would be attended by insuperable difficulties. It 
would be impossible to calculate with any degree of exactness 
the total product of a year's industry. Any figures that repre- 
sent a country's wealth are at best but approximate estimates. 
Hence, it would be impossible to know exactly what ought to 
be the share of the individual in this system of equal sharing. 
Again, it would be manifestly absurd to make all equal sharers 
in a product to which many through idleness and unskillfulness 
had contributed nothing. 

Equal sharing would bring about unjust expropriation of 
property, the destruction of all personal incentive to production, 
an appeal to violence. 

(2) Sharing according to Wants. — '' Every one should receive 
according to his wants." The proposal is that common stores 
are to receive all the outcome of production, and to these all the 
members of society may repair and from the common stock 
satisfy all their wants. 

This idea is founded on the assumption that the amount of 
wealth produced is sufficient to satisfy the wants of men. But 
if the amount of wealth is actually sufficient to satisfy the 
moderate and restricted wants of all the members of society, 
there would surely not be sufficient to satisfy the wants of men 
under a communistic regime, for it is a well-established fact 
that wants increase with the facility with which they can be 
satisfied. 

In such an order of things, there would be no authority to 
regulate wants. Mutual concessions, the exercise of kindly 
good will, and the feeling of fellowship would alone determine 
distribution. The absurdity and the utter impracticabiUty 
of such a method must appeal at once to any one who knows 
human nature. 

(3) Sharing according to Merits or Capacities. — '' Every one 
should receive according to his merits or capacities." The 
idea is chimerical. It supposes a state of society in which 



COOPERATION 391 

human frailties and human passions would not exist. It sup- 
poses that every member of society is possessed of honest zeal 
to do his utmost possible share of the general industrial labor, 
that an adequate and impartial supervision is possible whereby 
each one's endeavor may be justly estimated, and that every 
one will peacefully submit to the allotment that may be given 
him. 

(4) Sharing according to Labor. — '' Every one should receive 
according to his labor." All the instruments of production, 
capital and land, belonging to the nation, the proceeds of pro- 
duction are to be turned into the national treasury. After the 
national expenses are paid, the remainder is to be distributed 
among the producers, according to the labor each one has 
contributed. 

The principle is open to many difficulties. In every kind of 
society, there must be many individuals who are not actually 
employed in industrial labor. Such are teachers, judges, public 
officials, and many others. There would have to be some 
norm by which their services to the state or the community 
could be estimated in terms of labor. In regard to labor itself, 
is it to be measured by the time devoted to labor, the labor-time, 
or by the amount and kind of productive effort made, or by the 
actual product turned out by labor? 

The principle is founded on the false assumption that labor is 
the standard of all values, that a commodity will have value 
only dependent on the amount of labor required to produce it. 
Value, as we have seen, depends on the property possessed by a 
product to satisfy, a want and the desire men have for that 
product. 

Cooperation. — It is thought by some that the evils existing 
under the present methods of distribution may be remedied 
without any recourse to the Socialist systems, by means of 
cooperation. 

This system embraces all forms of cooperative societies, such 
as Consumers' Societies, Credit Associations, Productive Asso- 
ciations. The system does not do away with private property, 



392 



DISTRIBUTION 



nor has it any of the objectionable features attaching to Social- 
ism. It can scarcely be called a system. It is the effort on the 
part of groups of individuals banded together to render living 
cheaper, to do away in part with competition, to distribute 
more generally the profits accruing from production, to offer 
more easy means for the obtaining of capital. Some of these 
cooperative associations have already been discussed, and 
there will be occasion to discuss other forms of this system at a 
later period. 

The Catholic School. — Followers of the Catholic School do 
not deny that much of the evil existing in society is due to defec- 
tive methods of distribution at present in force. But they 
suggest no such drastic changes as do the Socialists, nor would 
they do away with existing social institutions. 

They advocate amelioration of the social evils through state 
interference, through wise legislation affecting inheritance, 
taxes, contracts, land rent, hours of labor, wages. They propose 
the uplifting of the working classes through the formation of 
associations and unions for their mutual protection and help. 
They appeal to the influence of the Church's teaching and the 
power of Christian doctrine to bring about a spirit of charity 
and justice in the mutual deahngs of capitalists and laborers, 
and a recognition on the part of the employer of the dignity 
of the man who labors for him and of his right to a reasonable 
and just share of the wealth produced. 

Parties to Distribution. — The several parties among whom 
distribution of the returns of production is made are variously 
classified by different authors. The more generally received 
classification is that of 

The Landlord, who receives rent for the use of his land ; 

The Capitalist, who receives interest on the capital furnished ; 

1 he Employer, who receives what is technically called profits ; 

The Laborer, who receives wages. 

We shall study each of these shares in the proceeds of produc- 
tion, Rent, Interest, Profits, and Wages, and seek out the prin- 
ciples that determine their distribution. Rent and interest 



RENT 393 

are considered in the remainder of this chapter; profits and 
wages in later chapters. 

II. Rent 

Definition. — Rent has a more exact meaning in economics 
than in the popular sense. In the popular sense, rent means 
the amount paid by the lessee of a house, a flat, a room, or a 
business building. In economics, rent bears relation to land, 
and means the revenue derived from the use of land and of the 
forces inherent in land. It is " the payment which an owner 
receives for the use of natural agents." (Laughlin, Political 
Economy, p. 264.) Walker defines it as '^ the remuneration 
received by the landowning class for the use of the native and 
indestructible powers of the soil, or for the use of natural agents." 
{Political Economy, p. 193.) 

" Natural agents include land, whether arable or timber land, 
mineral deposits, water power, or land peculiarly situated for 
building purposes." (Laughlin, Political Economy, p. 264.) 

" The rent of land is that portion of the revenue of the land 
that is paid the owner for the right to exploit the natural forces 
of the soil. 

" Rent can again be defined as that part of the returns from 
the land which corresponds to the productive power of the land. 
If you subtract from the product of the land the interest of the 
capital and the wages, the remainder will represent the rent. 
Product equals Interest, plus Wages, plus Rent ; hence. Rent 
equals Product minus Interest, minus Wages. Whence it 
follows that there will be rent as often as the value of the prod- 
uct surpasses the cost of production. A piece of land will 
bring in no rent, whenever the value of the product is absorbed 
by the cost of running the land. 

" Rent, as it has been explained, may be called absolute rent. 
It exists independently of all comparison with lands possessing 
superior or inferior qualities. Relative rent is the special profit 
from the fertility of good lands, an advantage resulting from the 
superior quality of the lands and surpassing the medium or 



394 



RENT 



the lowest rate of revenue from land." (Antoine, Cours d'eco- 
nomie sociale, p. 517.) 

For illustration, take a farm of fifty acres. It produces 
something when labor and capital are put into it. The factors 
of production are land, labor, and capital. Here we have land, 
meaning the soil itself and the productivity of the soil. Several 
laborers are employed in working the land — this is the labor. 
A certain amount of money is invested in buying plows, 
harrows, spades, seed, fertilizer, etc. — this is the capital. 

The three factors produce so many bushels of grain, of vege- 
tables, of fruit, etc. This product may be estimated in money. 
It is worth $1000, $2000, $3000. 

This money may be apportioned among the several factors. 
The labor is paid — this is wages. The capital must be paid 
for its use — this is interest. Five hundred dollars may be the 
amount of the wages which goes to the labor factor. Two hun- 
dred dollars may be the amount of the interest which goes to 
the capital. What remains of the product is the result of the 
inherent and indestructible forces of the soil, the productivity 
of the soil. This is the rent. These inherent forces have been 
at work in producing the grain, the vegetables, the fruit, etc. 
They could not act without labor and capital. But with labor 
and capital they do produce, and the more skilled the labor 
and the more wisely directed the capital, the more effective 
will be these inherent forces of the soil, and the greater and 
more valuable will be the final product. 

It may happen that the farmer who works a farm is also the 
landlord, the owner of the land. In that case the farmer may be 
conceived from two aspects, — he is the farmer who invests his 
labor and his capital, and as such he receives his interest on his 
investment and his wages ; and he is also the owner, and as such 
he receives the surplus over the expenses and interest, the rent. 
The principle is not affected, whether the farmer pays the rent 
to himself or to another. 

The owner of the land has a right to the portion of the product 
called rent. He owns the land, and he owns it with all the in- 



■ RICARDO'S THEORY OF RENT 395 

herent forces contained in it. He owns the cause and he owns 
the effect. Res frucHficat domino. 

This principle applies to business lots, to mines, and to all 
natural agencies. 

It is to be noticed that rent does not affect the price of agri- 
cultural products. The price of wheat, corn, oats, etc., is deter- 
mined by the demand for these products. This price affects 
cultivation, and when it rises, it causes lands less fertile and 
less favorably situated to be brought under cultivation. The 
raised price permits these inferior lands to become rent-paying 
lands, and proportionately increases the returns, thus increasing 
the rent, of lands possessed of greater fertility. Rent is thus 
the result of increased demand for produce, which demand 
causes a rise in the price of the produce. Rent, therefore, is 
not the cause of the high prices of foodstuffs. Hence the ac- 
cusation that the large rents received by landlords are the cause 
of the rise in prices of farm products is unjustifiable. The 
cause of such a rise must be sought elsewhere. 

Ricardo's Theory of Rent. — Ricardo's theory is founded on 
the law of diminishing returns. Land is limited in amount and 
in fertility. Every increase of labor and capital applied to land 
will increase the returns from the land, but after a certain period 
is reached, the returns will become gradually less proportionately 
to the outlay, until all profit will cease. 

The various forces which lead up to rent are (i) an increase of 
population ; (2) demand for more food ; (3) more extensive 
cultivation of land, or more intensive cultivation of the same 
land, setting up a classification of land into different grades, 
according to the productixnty of the different grades. When 
such a situation exists, rent comes into existence. 

Lands are classified in different grades according to the net 
profit received from the product of the lands. Two strips of 
land although having the same area will vary in the returns. 

This may arise, first, from the fact that differently paying 
articles are produced by the two lands, a tobacco crop, for 
example, paying more than a wheat crop. 



396 RENT 

It may arise, secondly, from the varying fertility of the two 
lands. States, counties, farms, differ in fertility. The factors 
which aid fertihty, slope, exposure to sun, watershed, drainage, 
rainfall, constituents of soil, are not possessed equally by all 
lands. Hence, some lands will be classed as superior, others as 
inferior. 

Thirdly, lands which are equally fertile will sum up different 
net returns according to the situation of the lands with regard 
to the markets. The expense of transportation must be taken 
into account, and the land farthest removed from the market 
and requiring a greater transportation cost for bringing its prod- 
uce to market will be ranked inferior to another land which is 
more favorably situated and requires smaller transportation 
cost. That lands may be classed in different grades, as superior 
and inferior, must now be evident. 

We saw before, in studying the price of commodities, that 
the price will be determined by the lowest or the highest cost 
of production, according to whether the commodity can of 
cannot be produced at the will of the producer. We saw that 
hammers, for example, would have their price determined by 
the lowest cost of production, because no hmit need be fixed to 
the amount of hammers turned out. They may be manufac- 
tured at the will of the producer. 

We saw also that the natural products, the cereals, wheat, 
corn, oats, rye, will have their price determined by the highest 
cost of production, because these products are fixed in amount 
at the end of the growing season and cannot be increased at the 
will of the producer. 

The market price of the cereals, therefore, will be such a price 
as to cover the greatest cost of production, will be such a price 
as to enable the most inferior lands, which demand for food brings 
into cultivation, to reap a paying return. If such a price did not 
prevail, the inferior lands would not be cultivated, and the supply 
of foodstuffs would be diminished. The demand would raise 
the price of the diminished supply, and the inferior lands would 
be again cultivated and reap a profit. 



RICARDO'S THEORY OF RENT 397 

The price of land products is, therefore, fixed by the highest 
cost of production. It is fixed by the poorest lands which the 
demand for such products brings under cultivation. It is the 
same for the whole country. 

Now, let us suppose that we have four different parcels of 
land all under cultivation at the same time and producing for 
the same market. Equal amounts of capital and labor are 
expended on the several pieces of land. These farms bring in 
different net returns, owing to different degrees of fertility or 
different locations with respect to the market. The net returns 
for the several farms will be definite sums, differing one from 
another and rising from a minimum to a maximum. 

The net returns must pay first of all the expenses of labor and 
capital, i.e. wages for the laborers and a reasonable interest 
on the invested capital. Whatever is over and above these 
expenses for labor and capital is called rent, and is the portion 
of the landlord or owner. 

It may be possible that the most inferior farm, the poorest 
land, will bring in as net returns only just enough to pay the ex- 
penses of labor and capital. This land will be called rightly no- 
rent land. It is also called the margin of cultivation. It may be 
cultivated by the owner for the reason that it pays expenses to 
cultivate it. It furnishes interest on the capital invested per- 
haps equal to the interest to be derived from any other business 
investment. It may be leased by the owner for a nominal rent, 
in order that the farm may not be idle and the houses may be 
kept in repair. • 

All the farms above this poorest, no-rent land will bring in a 
certain amount of rent differing according to the degree of supe- 
riority of the lands. The rent in each case will be the excess of 
the net returns over what is required to pay wages and a reason- 
able interest. 

From all the above may be derived the Law of Rent: — ■ 

I. Rent arises out of the differences existing in the productive- 
ness of different soils under cultivation at the same time for the 
purpose of supplying the same market. 



398 RENT 

2. The amount of rent is determined by the degree of those 
differences. 

The principle governing rent, as just explained, was stated 
clearly by Ricardo, and it is called Ricardo's law. 

Ricardo's law of rent can be illustrated as follows : — 

Farms A B C D 

Product — bushels 240 180 120 60 

Returns $240 $180 $120 $60 

Capital and labor — the same for each farm. 
Market price — $1 a bushel. 

Let A, B, C, D represent four farms of different fertility and 
productiveness signified by the figures 240, 180, 120, 60, indicating 
the number of bushels supphed respectively by the farms. A 
certain amount of capital and labor, the same for each farm, is 
expended on the farms. A definite return must be made by the 
produce to pay expenses and interest on the capital invested. 
The actual returns that would be made by the above farms with 
the produce at one dollar a bushel would be ^ = $240 ; ^ = $180 ; 
C = $i2o; and D = $6o. 

Now, let us suppose that $240 is the sum required to pay ex- 
penses and interest. Then, A would be no-rent land, and Bj 
C, D would not be cultivated at all, because they would not pay 
expenses and interest. 

This state of things will last, while the A lands are able to 
supply the demand for the product. But let there be an increase 
of population to such an extent that the A lands cannot supply 
the demand. • Then, the demand increasing and the supply 
remaining the same, the price will rise. The demand must be 
supplied. Other lands will be brought under cultivation. The 
B land will be cultivated. But the B land must return at least 
$240, since that is necessary to pay expenses and interest. 
Hence the 180 bushels, the produce of the B land, must bring 
in $240, i.e. the product must sell for $1.34 a bushel in the 
market. The increased demand will cause the price to rise from 
$1 to $1.34. Now the B land will pay for its cultivation, but it 
will be no-rent land, and C and D will not be cultivated. 



RICARDO'S THEORY OF RENT 399 

In the meantime, the A land, because of the rise in price of 
the product, will bring in a return of $320. Of this, $240 will 
go to pay expenses and interest as before, and the surplus, 
$80, will be rent, and will be paid as rent to the owner of the land, 
to the landlord. 

If the population should again increase and the demand become 
greater, the price of the product may rise to $2 a bushel. Then 
the C land would become the margin of cultivation and would be 
the no-rent land, while A would return $480, and B would return 
$360. Now, subtracting the original $240, A would pay a rent 
of $240, and B would pay a rent of $120. 

Should the same factors work further and bring the price of 
the product per bushel to $4, the D land would be cultivated 
and the rents paid by A, B, C would be respectively $720, 
$480, and $240. 

If there were another land, E, giving 300 bushels and therefore 
more fertile than A, B, C, D, but situated at a distance from the 
market where the produce oi A, B, C, D is sold, the cost of 
transportation must be taken into account and deducted from 
the value of the produce of the E land, thus bringing it down 
to a level with the A land or possibly with the B land or the C 
land. 

If, instead of extensive cultivation, as in the illustration, 
intensive cultivation be employed, the same principles will 
hold, but the A, B, C, D will represent, instead of different 
farms or lands, the additions of labor and capital put into the 
first land. 

The statement of Ricardo's law of rent will now be understood 
if expressed as follows : The rent of any piece of land is the excess 
of its produce over the produce of that land which just repays 
the current rewards for the sacrifices of production. 

The forces which work against the actual carrying out of the 
law as stated are : — 

(i) Any improvements in cultivation, in machinery, in in- 
telligence, in chemical knowledge of the soil, in methods of trans- 
portation, — all of which check the law of diminishing returns. 



400 



INTEREST 



(2) Competition of new lands. 

Ricardo's explanation of rent is theoretic. It is in great 
measure fanciful and contrary to facts, as the best lands are not 
the lands first cultivated. It supposes perfect competition, and 
that no personal or social considerations have influence on the 
working out of the theory. Such conditions are very hard to 
find in the actual world. They are, however, found approxi- 
mately in the United States. 

In England, public sentiment favors the tenant class. The 
same man is often the tenant for years. The landlord shows 
much consideration for the tenant. In countries on the con- 
tinent, custom determines the rent in great measure. In Ire- 
land, owing to past tyranny on the part of England, the ten- 
ants are often found to be ignorant, degraded, and improvident, 
and there is little friendly sentiment in favor of the tenant. 

Ricardo's law is made to apply also to the rent of building lots. 
It applies to mines, but only in part, as increased compensation 
must be made because the mines will be exhausted in time. 

III. Interest 

Definition. — Interest is that portion of the product which 
is given to the capitalist. The capitalist is one who invests 
capital in business or loans it out to others who are engaged 
in business. 

The capitalist may be at once the person who invests his money 
in some business concern and the person who manages the busi- 
ness. In that case, we must distinguish two different kinds of 
returns which the business brings in, the profits which that person 
receives as manager of the concern, and the interest which the 
same person receives as a capitalist. If the manager borrowed 
his capital, the distinction would be clear. 

We are considering here only that part of the returns which 
goes as interest to the capitalist. 

Capital, as we saw before, is defined as that part of wealth 
which is devoted to the production of more wealth. 

Interest is the compensation paid for the use of capital. 



HISTORICAL SKETCH 401 

Historical Sketch. — Until comparatively recent times, no 
clear distinction was made between interest and usury. The 
terms were identical in meaning. 

Interest, as signifying in general the compensation due to the 
lender for the use of money loaned, was known in the most 
ancient times, and it was generally condemned. The ancient 
philosophers, Plato, Aristotle, Cato, Seneca, Plutarch, con- 
demned it. (Cathrein, M oralphilosophie, 1899, II, p. 350.) 

It was condemned by the Scriptures. (Deut. xxiii, 19, 20; 
Ps. xiv, 5 ; Luke vi, 35.) The Fathers of the Church in- 
veighed against it, and they appealed to the authority of the 
Scriptures. 

The Church has pronounced against interest taking from the 
most ancient times down to the beginning of the nineteenth 
century. 

Some of the earlier Synods and Councils forbade the taking 
of interest by all clerics, and pronounced severe penalties against 
such as were guilty. (See Hefele, Conciles de VEglise. — El- 
vira, 300 [can. 20]; Aries, 314 [can. 12]; Nicea, 325 [can. 17]; 
Orleans, 538 [can. 27] ; " In TruUo," 692.) 

Later Councils (two English Councils, 787 ; Aix-la-Chapelle, 
789) condemned interest taking among lay persons, and 
throughout the following years different Councils and Popes 
denounced and prohibited the practice among all classes of 
the faithful. (Vienna, 1311 ; Lateran V, 1515 ; Alexander VII, 
1665 ; Innocent XI, 1679. — Denzinger, Enchiridion, Nos. 
407, 623, 1013, 1058, 1059.) 

The canonists and theologians, as a rule, decried the taking 
of interest. The general opinion may be found contained in 
St. Thomas {Summa, 2-2, q. 78. a.i), who argued that, when 
money is loaned, it is consumed in the use made of it, and if 
more were exacted for a sum of money loaned than the sum it- 
self, gain would be made out of both the thing itself and the 
use of the thing, and injustice would be done. He declared that 
money is a thing in which no distinction is to be made between 
the thing itself and the use that is made of it. It is like wine 

POL. ECON. 26 



402 INTEREST 

or corn or any other consumable thing. To require compensa- 
tion for the use of money would be similar to requiring one 
payment for a gallon of wine or a bushel of corn and another 
added payment for the use or consumption of the wine or corn. 
Justice in contracts required that values given in exchange should 
be equal. It would be unjust to demand a return of more than 
the loan. 

It was, however, admitted by all writers of this time and by 
the Church herself, that there existed certain extrinsic circum- 
stances which justified the taking of interest. Such extrinsic 
circumstances were : — 

1. The deprivation on the part of the lender of the use of the 
money while it was out on loan. 

2. The positive loss to which the lender might at times be 
subjected by the loan he had made. 

3. The danger to which the lender was exposed of not re- 
covering his money. 

4. Delay in returning the loan. 

These circumstances, all extrinsic to the loan, were titles that 
justified the acceptance of interest. 

But interest in itself and by reason of the loan itself and inde- 
pendent of all external circumstances was condemned as unjust 
by the moralists and almost universally decried. 

Some have thought that the Church opposed interest be- 
cause money loans were made to the poor and needy for pur- 
poses of consumption only, and declared that when money was 
loaned for production, interest was not unlawful. But opposed 
to this view is the fact that Benedict XIV, in his famous Encycli- 
cal Vix pervenit (1745), explicitly declared that interest taking 
{vi mutui) was forbidden, even when the money was loaned to 
the rich and was to be employed for the sake of gain in com- 
mercial transactions. (Denzinger, Enchiridion, Nos. 13 18, 
1319. Cf. Walter, " Wucher und Zins," in Staats Lexicon, 
pp. 1376, 1396. Cf. also Cathrein, Moralphilosophie, II, p. 
358, No. 5.) 

There can scarcely be any doubt that in a certain limited 



HISTORICAL SKETCH 403 

sense loans were sought for productive purposes, even while 
there existed the stringent ecclesiastical opposition to interest, 
especially during the later period of such opposition. Nor 
were there wanting means by which money could then be loaned 
at interest as it is to-day. There were always the extrinsic 
titles already mentioned that justified the acceptance of interest, 
and these titles could practically always be found in any actual 
loan. 

Various other devices were resorted to which were thought to 
justify the taking of interest. Thus, money was loaned for a 
definite time but not reclaimed until some period subsequent 
to maturity, and interest was charged for the delay. Again, 
he who made the loan for business was conceived to become a 
partner of the borrower, and thus had a right to a surplus over 
his loan. In other instances, the title was conceived to lie in 
the presumption that money in hand was worth more than money 
to be received at a future time, and hence interest was justifiable 
for a loan that deprived the lender of a present sum of money. 
Still further, interest was claimed on the ground of the gratitude 
the borrower felt or should feel for the money loaned. (Cf. 
Lehmkuhl, Theologia M oralis, I.) 

Several of the devices resorted to were condemned by some of 
the Popes. (Alexander VII, 1665 ; Innocent XI, 1679. Den- 
zinger. Enchiridion, 1013, 1058, 1059.) 

The concept of the productivity of money as capital was not, 
however, generally grasped during the Middle Ages. And, 
indeed, the use of capital as a productive agent in any universal 
sense dates from about the beginning of the nineteenth century, 
when machinery came into general use, and individual industries 
began to be replaced by large capitalistic industries. 

Economic conditions were not the same in past times as they 
are to-day. Money was not recognized generally as a factor 
in production. It was conceived in itself and without relation 
to labor or nature's materials and forces, and as such it was a 
mere fungible thing consumed in use. Money played but a 
comparatively small part in production. It served mostly to 



404 INTEREST 

provide for consumptive purposes. Labor and nature were the 
recognized sources of production. Only in exceptional cases 
was money employed in a productive sense. 

Civil authority first authorized interest in Bavaria, Germany, 
in 1553, and later, in 1654, it was allowed bylaw throughout 
all the German States. In 1787, in Austria, the laws granted 
freedom with regard to the rate of interest. In France, a law 
was passed in 1789 allowing interest. (Walter, " Wucher und 
Zins," in Staats Lexicon, p. 1384.) 

In the beginning of the nineteenth century there were found 
theologians who endeavored to prove that interest taking was 
not in itself unjust. They did so in spite of the array of high 
authorities of past times who had almost unanimously declared 
it unjust. 

These writers showed that interest had been condemned in 
the past through a wrong concept of money, and they demon- 
strated the new concept that should be held of it as a productive 
factor, which rendered the taking of interest wholly justifiable. 
They already saw the truth of the matter, as it has been generally 
received in modern times. 

In 1830, Pope Pius VIII was appealed to by a bishop of 
France to decide the question of interest, which caused dis- 
sensions and troubles among the faithful. This appeal and others 
that followed brought out the decisions of Pope Pius VIII, and 
later (1831) of the Congregation of the Holy Office, and still 
later (1838) of the Inquisition, allowing the practice of interest 
taking. (Cathrein, Moralphilosophie, II, p. 351.) 

From about the beginning of the nineteenth century, the 
economic principle of interest became firmly established, and 
it is to-day received as one of the self-evident factors in com- 
mercial life. 

Consideration of the Attitude of the Church with Regard to 
Interest. — Some would defend the Church and excuse her 
attitude towards interest on the ground that in her condemnation 
of interest she intended only to condemn usury. They would 
contend also that the condemnation of the Scriptures had ref- 



ATTITUDE OF THE CHURCH 405 

erence only to usury. Such, however, is not the stand taken 
by the more prominent apologists of the Church. 

In the opinion of the latter, it seems more consonant with 
facts to admit that the general consensus of opinion of the Church, 
the Fathers, and the theologians of past times practically made 
no distinction between interest and usury, and that they univer- 
sally condemned the making of any gain by reason of a loan, 
when the loan was considered in itself and without any extrinsic 
justifying circumstances. (Cf. Cathrein, Moralphilosophie, II, 
p. 350 et seq. A. Koch, " Zins und Wucher," in Kirchen Lexi- 
con, p. 1968.) 

The attitude of past ages with regard to interest depended 
on the view universally held of money. Money was conceived 
merely as a medium of exchange and a measure of value. When 
considered by itself, it has that meaning even to-day. It is 
only when it is put into the hands of the merchant, only when it 
is joined to the two other factors of production, nature and 
labor, that it becomes a productive agent. If left to itself, it 
is unproductive and can never add one jot of increase to its 
value. 

In the view of past ages, money had for its proper and principal 
use merely consumption. It was employed for the buying of 
food, of clothing, of equipments which did not enter into pro- 
duction. 

The borrowers of the old Roman time were the poor plebeians 
who borrowed from the rich patricians to buy food ; the borrow- 
ers of the Middle Ages were the penniless knights who asked 
loans to equip themselves for the Crusades, and the poorer classes 
of the people who needed the loans for their sustenance. At all 
times, the loans were for unproductive consumption. 

Interest taking was used as a means of making profit out of 
the poor and needy. When the loans became due, the bor- 
rowers had frequently nothing to offer but their persons and their 
labor and their property. As a result, they became the slaves 
of the creditors or they were despoiled of their property. The 
prevalence of usurious practices in the Middle Ages and the ruin 



4o6 INTEREST 

they brought on the poor are matters of history. The rights of 
personal Uberty and the rights of property were destroyed. 

It was to aid the poorer classes of the people, who, when in 
need, were obliged to pay for loans 50 and 60 per cent to the 
usurers, that several of the Popes of the Middle Ages gave their 
sanction to the Montes Pietatis, instituted by the Franciscans 
throughout Italy during the fifteenth and sixteenth centuries (be- 
ginning 1462). These institutions enabled the needy to secure the 
necessary loans without paying the exorbitant rates demanded by 
the money lenders. They were allowed to exact a moderate sum 
by way of indemnity and to cover the expenses incurred in their 
management. (Cf. Denzinger, Enchiridion, No. 624. Cf. P. 
Heribert Holzapfel, O. F. M., Die Anfdnge der Montes Pietatis.) 

It is the glory of the Church that she stood opposed to the^ 
exorbitant gains that were wrung by the lenders of money from 
the needs of the people. When money loans led to evils that 
affected the whole of society, it is not strange to find all the 
Church's forces arrayed against the practice of loaning money 
for interest. It is not strange to see the Church's theologians 
strenuously condemning the evil. As they reasoned, a person 
could not justly demand compensation at once for the substance 
of a thing and for its use. Justice demanded equality between 
that which was given and that which was received. If a man 
loaned one hundred dollars, equality of justice required that he 
receive one hundred dollars and no more. 

In those past times, conditions were not the same as exist 
to-day. As we have seen, the general concept of money was 
different from that now obtaining. It was looked upon merely 
as a consumptive commodity. And, as a matter of fact, before 
the beginning of the nineteenth century, when new systems of 
industry began, and the introduction of machinery and count- 
less inventions revolutionized business methods, money played 
but a small part in production. The two factors, labor and 
nature, were the recognized sources of production. 

Yet even in those times, when money would enter into produc- 
tive industries, there existed always the extrinsic titles, which al- 



ATTITUDE OF THE CHURCH 407 

lowed the taking of interest, and various other methods which 
permitted a just emolument for money loans. (Cf. Lehmkuhl, 
Theologia Moralis, 1, No. 1094. Denzinger, Enchiridion, 607.) 

In modern times, the conditions that existed during the 
Middle Ages no longer exist. To-day, the borrowers of money 
are in many cases the rich and the powerful. They do not need 
protection, as did the borrowers of olden times. 

Again, the use and the concept of money have changed. 
Loans are not made to-day solely in order that the money may be 
consumed in supplying the personal wants of the borrower. 
Another use has arisen for money and another purpose for loans. 
Money is borrowed for capital to serve in production. Money 
has become a productive agent. It is sunk in land, houses, 
machinery, tools, wages, repair funds, transportation ; in fact, in 
all the various agents which aid in production. Money, there- 
fore, is operative, it is fruitful, it adds to itself through its 
concurrence with labor and the materials furnished by nature. 

He, then, who loans a sum of money to-day loans also the 
power that sum of money has as capital of increasing wealth, 
and upon the maturity of the loan he is entitled to receive not 
only the actual amount of the loan, but an added sum in the form 
of interest, which will pay him for the inherent property money 
capital possesses, and of the use of which the lender has deprived 
himself through the loan he has made. Indeed, unless such added 
sum, the interest, be paid him, the lender would not receive an 
equivalent for what he has given. Hence, interest is just. 

Such is the new concept of money, which has arisen in modern 
times. 

The Church of the past, then, may well be justified for her 
attitude towards interest taking. When conditions changed, 
the Church changed in her attitude towards interest. Nor is 
there contradiction in this, for the matter that fell under her 
condemnation in the past has changed with the new conditions 
of commercial life, and has ceased to be the evil that it once was. 
The Church did not anticipate the social change, she followed 
rather and conformed her views to the changed conditions. 



4o8 INTEREST 

That the theologians were slow to change their opinion with 
regard to interest should not be surprising. The changes in 
economic conditions are matter for economists and not for 
Churchmen. Besides, the change of conditions was slow and 
very gradual and not easy of notice except to those connected 
with economic matters. 

It is easy for us to-day to see the changed conditions, but 
while the process of change was still under way, it was not so 
easy to detect it. 

Even economists and jurists of every denomination denounced 
interest up to the nineteenth century. If they may be excused, 
how much more the theologians for the conservative stand they 
maintained on the subject of interest, which stand, until the 
recent changed conditions, was undoubtedly justifiable. (Cath- 
rein, Moralphilosophie, II, p. 360.) 

Objections to Interest. — The objections against interest that 
have at various times been made may be included under the 
following heads : — 

1 . Money is unproductive ; one coin cannot produce another ; 
a sum of money may remain for centuries in a vault and it 
will not increase. 

2. The lender undergoes no privation in lending the surplus 
money which he has, and hence he has no right to receive in- 
demnity in the form of interest. 

3. The perpetuity of interest is unnatural and unjust. At 
,the rate of 5 per cent interest, the lender may receive his 
original loan entire in some twenty or forty years, and in a 
longer time he will double the loan and still he will retain a right 
to the original loan. 

4. The borrower has to pay back more than he receives and 
hence there is a violation of justice, which requires equivalence 
between the thing given and the thing received. 

The answers made to these objections have been given more 
or less fully in preceding pages. They may be again briefly sum- 
marized : — 

I. Money itself is not productive, but money represents capi- 



THEORIES OF INTEREST 409 

tal, which is productive. The loan is spent in machinery, wages, 
salaries, and produces more than itself in the end. 

2. There is privation in the technical sense. The millionaire 
who lends $100,000 deprives himself of the use of that sum. 

3. Interest here is like rent. If one uses a farm for a great 
number of years, he must pay rent. There is no objection to per- 
petual rent. There is no more reason for objection to perpetual 
interest. 

4. It is true that one who lends $100 receives at the end of the 
year $105 or $106, which is more than he gave, but here must 
be taken into account the various factors which justify interest, 
the fruitfulness of money capital, the use of which the lender 
deprives himself in loaning money which through production 
might have resulted in his own enrichment, the time during 
which the lender is deprived of his money. If only $100 is 
returned at the end of the year, the lender does not receive an 
equivalent for what he has given. (Cf. Gide, Principles of 
Political Economy, p. 556.) 

Theories of Interest. — Several theories are advanced to 
explain the reason why interest is due for money loaned, as 
follows : — 

(i) Productivity. — Capital is productive. It is invested in 
workshops, machinery, tools, labor, and these all contribute to 
the production of articles of value, which through their sale 
produce an amount of wealth greater than the original amount 
employed as capital. He who has dominion over a productive 
source can rightly claim a part of the product. The owner of 
the capital, therefore, receives a share in the production which 
has been made possible in part by his capital, and this share is 
called interest. 

(2) Use. — The capitalist who furnishes capital to another 
engaged in some productive industry gives up the use of that 
capital and thereby gives up to another something which is an 
economic commodity and has value. The payment he receives 
for this valuable commodity is interest. 

(3) Abstinence. — A person who abstains from the present 



4IO INTEREST 

use of his wealth and devotes it as capital to the production of 
more wealth, thereby brings about an increase in product. 
His abstinence is the condition of the increase. This abstinence 
is rewarded by a certain percentage out of the product, and this 
is called interest. 

(4) Labor. — Interest is a reward paid the capitalist for his 
labor. In what that labor precisely consists, the schools are at 
variance. According to the English authors, the labor is that 
performed by the capitalist in producing the capital. Accord- 
ing to French writers, the labor consists in saving the capital. 
Much will power and firmness are required to save. 

(5) Time. — Present goods are more valuable than future 
goods. A capitalist deprives himself of his present wealth and 
looks forward to receiving it back in some future day. A cer- 
tain premium is due him for this deprivation of what, being a 
present good, is considered a more valuable thing in exchange for 
what, being a future good, is considered of less value. This 
premium is called interest. 

The theories set forth above are not contradictory. They 
may all, indeed, be reduced to the same. Money loaned for 
productive purposes brings in a return to the lender, because of 
its productive nature when used as capital. This seems to be 
the fundamental reason for interest. 

Money could not become loaned capital unless the lender 
deprived himself of the use of the money. Nor could there be 
such a loan, unless the lender abstained from the present use of 
his money. Labor, however it is to be interpreted, is again a 
condition, as is also the element of time. 

Again, all these conditions suppose the fruitfulness, the pro- 
ductive capacity which lies in money loaned as capital, and the 
possibility of these or any other factors as the causes of interest 
rests upon the productive nature of money. Hence, these several 
theories practically all express the same principle under different 
terms. 

The Socialist Theory. — There is another theory set forth 
by the Socialists to explain interest, viz., exploitation. This 



RATE OF INTEREST 41 1 

is the theory held by Karl Marx. It declares that rent, interest, 
and profits are due to the exploitation of the working class by 
the rich. There was a time, according to this theory, when all 
men were laborers and all were socially equal. But gradually in 
the course of social evolution some comparatively few individuals, 
owing to chance circumstances, got possession of all the resources 
that could enter into production. There came about the forma- 
tion of the two classes, the rich and the poor. The former pos- 
sessed wealth and became the directors of all production. The 
latter had only their labor capacity, which they were obliged to 
sell at the lowest possible price to the holders of wealth. The 
rich determined the amount of rent, of interest, of profits, which 
should return to them for the use of their land and capital, and 
the working classes were obliged to give the maximum amount 
of labor for the minimum compensation, in order that the rent, 
the interest, and the profits of the rich might be increased. 

This theory is a corollary of the Socialistic principles, that 
labor is the measure of the value of all commodities ; that labor 
and nature are the essential factors of production, capital being 
only subordinate and reducible to labor; that labor has an 
equitable right to the whole of the product in production. These 
principles have already been rejected (pp. 40, 41), and a further 
discussion of the theory will be seen under profits (p. 426) and 
wages (p. 451). 

Rate of Interest. — The rate of interest is the amount per 
cent that is received by the capitalist for the use of his money. 

Most states fix a legal rate of interest, which is the rate charged 
in the absence of special contract fixing the rate. In most 
states, again, a maximum rate of interest is fixed within and 
up to which interest may be determined by contract. This rate 
in some states is the same as the normal legal rate, and in 
some states it is higher. Beyond this maximum legal rate, in- 
terest becomes usury and is punished by various penalties. In 
certain states, however, no limit is put to the rate that may be 
agreed upon by contract. 

There is a constant tendency on the part of interest to reach a 



412 



INTEREST 



uniform level. This is due to the mobility of capital, which is 
ready to invest in undertakings, wherever they may be, that 
offer invitingly high rates. The leveling, however, is slow, be- 
cause the mobility of capital is not perfect. There is an immense 
proportion of capital which is fixed and cannot easily be moved. 

Interest has fallen considerably during past years, owing to 
the great increase of capital. 

There can be no fixed law laid down for the determination of 
the rate of interest. Many varied factors enter into the field. 
In general, however, the most salient factors, which determine 
interest rates, not indeed individually, but collectively, may be 
embraced in the following list : — 

1. The Amount of Money available as Capital. — At times, 
there is a great amount of money in the possession of banks and 
loan companies which may be dispensed in loans, and in that 
case the rate of interest demanded will be low. At other times, 
this available amount will be reduced to a small sum, and if 
loans are wanted, high rates must be paid. 

2. The Degree of Prosperity of a Country. — When a country 
is very prosperous, the individuals of the country save more, 
more money is deposited in banks and placed in insurance com- 
panies, and thus more money becomes available for loans. Again, 
when great prosperity exists, there is a greater demand for 
products, and more capital is needed to carry on increased pro- 
duction to satisfy increased demand. As prosperity diminishes, 
bank deposits decrease, production contracts, and less capital 
can be obtained and less is needed in the changed conditions. 
All these circumstances will evidently affect the rate of interest. 

3. The Degree of Success of the Various Business Concerns in 
which Capital is Invested. — No two businesses will pay the 
same rate of interest on their capitals. The rate will depend 
on the many factors which make for the success of the concerns. 
Ability on the part of the manager in curtailing expenses, suc- 
cessful competition by which profitable markets are secured, 
possession of exclusive patents, and many other factors will 
bring about in certain business enterprises remarkable success 



QUESTIONS 413 

and large returns, out of which high rates of interest may go to 
the capitaHsts who have furnished the capital. Other businesses 
which are not so fortunate must be content with lower rates of 
interest. 

4. The Degree of Security^ political, legal, moral, existing in a 
community, and determining the amount of risk capital is ex- 
posed to, when invested for various productive purposes. Any- 
thing that threatens this security will produce a hoarding of 
capital and a withdrawal of it from investment. 

QUESTIONS 

1. What questions are involved under distribution? 

2. What is the Catholic view in regard to social conditions ? 

3. What are the principles of the Socialists regarding distribution ? What 

is your conclusion with regard to the practical application of each of 
the principles ? 

4. What is the object of cooperation ? 

5. What are the views of the Catholic School with regard to distribution ? 

6. Who are the parties to distribution ? 

7. What is rent ? Illustrate by example. Why has the owner of land a 

right to rent ? Does rent affect the price of foodstuffs ? 

8. Explain Ricardo's theory of rent. What are its laws? 

9. Give an example to show the working of Ricardo's theory of rent. 

10. What objection is there to Ricardo's theory of rent? 

1 1 . What is interest ? 

12. Give an historical sketch of interest. 

13. How can the attitude of the Catholic Church towards interest be 

explained ? 

14. State the objections made against interest. Answer the objections. 

15. Mention and explain the various theories of interest. To what can 

they all be reduced? 

16. Explain and refute the Socialist theory of interest. 

17. What is rate of interest ? What factors determine the rate of interest ? 



CHAPTER XXII 
PROFITS 

The Manager. — The name given to the class that receives 
profits is the manager, or, as the French has it, the entrepreneur. 

It means the person who conducts the business, who collects 
the capital, invests it, labors to make it productive. It means 
the small storekeeper, the small individual producer, whatever 
his line of business, as it means the bank president, the director 
of large-scale industries, and the manager of great manufactur- 
ing establishments. 

It is he " who organizes and conducts production, deciding 
what shall be produced, in what amounts, of what varieties, 
materials, and patterns ; and to what persons, at what prices, 
and on what terms of payment the products shall be sold." 
(Walker, Political Economy, p. 232.) 

The qualities required in a successful manager, especially in 
the great industries, are manifold. He must have knowledge of 
the technical processes of his business. He must have ability 
to judge men, and tact in his relations with them ; he must be 
able to choose his subordinates and to win the confidence and 
good will of all under him. He must have unusual foresight in 
his commercial dealings, anticipate future demand and prepare 
for it, guard against loss which may depend on future conditions 
imperceptible at the present time to ordinary minds, and form a 
commercial policy that will be at once broad and safe. 

He must assume responsibilities and provide against contin- 
gencies, shape and direct production, organize and control the 
industrial machinery. He must have ability to command 
financial resources. Business is done to-day usually with bor- 

414 



THE MANAGER 415 

rowed capital, and the ability to obtain loans when they are 
needed will depend in great measure on the credit and reputation 
of the business manager. 

These are some of the qualities which must be possessed by 
the manager, or entrepreneur. Such men often rise from the 
lowest grades. More than one half of the present employers, as 
Marshall, an English economist, remarks, have risen from the 
ranks of labor. Whenever such men are to be found, there will 
never be wanting the resources, the capital, with which to under- 
take great commercial enterprises. 

The manager may at the same time be a capitalist and may 
furnish much or part of the capital employed in the business which 
he directs. We are here, however, considering him only as 
manager, and studying the principles which affect the share of 
the product which he receives as manager. The share which 
the manager receives is called profits. 

The term '' profits " has different meanings according to the 
conception one forms of the class called manager. After the 
English economists' view, the manager is identical with the capi- 
talist, and the profits of the manager are a capitalistic income, 
analogous to interest, but fixed at a somewhat higher level than 
ordinary interest, because of the risks taken by the manager and 
his personal labor in directing the business. 

According to French economists, the entrepreneur is distinct 
from the capitalist, and his predominant characteristic is the 
performance of a certain kind of labor. Profits, therefore, in 
this view, are the remuneration of labor, but of a peculiar kind of 
labor, differing from manual labor, superior to it from the stand- 
point of productivity, and consisting of the following factors : ^- 

(i) Invention. — The entrepreneur must have ideas, he must 
invent new methods of production, new varieties of commodities, 
new wants among the consumers. 

(2) Superintendence. — Collective labor is more productive 
than individual and isolated labor only on condition that it is 
organized, disciplined, and commanded by some one leader. 
The work must be divided among numerous laborers in such a 



4i6 ' PROFITS 

way that the best results may be obtained. Good generalship 
is required in business as it is in war, for business is very much 
like war. " Everyday experience shows that of two enterprises 
employing an equal number of workmen possessing the same 
abihty, one succeeds and the other fails miserably simply because 
one has the better leadership." (Gide, Principles of Political 
Economy, p. 625.) 

(3) Commercial Speculation. — The great problem in business 
is not so much to produce goods as to sell them. The ability 
to create markets, to buy and sell on the most favorable terms, 
is one of the principal accomplishments of the successful entre- 
preneur. 

Other economists consider the entrepreneur as a monopolist. 
The monopoly may be a natural monopoly resulting from the 
exceptional personal abilities of the manager, or from special 
advantages of situation or opportunity. It may be a legal 
monopoly due, for example, to a protective tariff or to the ex- 
clusive possession of certain inventions. Profits would here 
be considered as a monopolistic income, a surplus due to the 
manager because he possesses the monopoly. This monopoly 
•consists not always in the ability of the manager to sell goods 
above the current prices, but in the possession of a secret or of 
some advantage which enables him to make goods at less than 
the ordinary cost of production. 

What constitute Profits. — It would at first appear to be an 
easy matter to determine what actually constitute profits in any 
business. 

Profits are classified as Gross profits and Net profits. Gross 
profits are the entire returns gained by an industry on the 
produce of that industry. Net profits are all those returns less 
the expenses incurred in carrying on the industry and putting 
the finished product finally on the market. 

The real profits, consisting properly of the net profits, may be 
said to consist of the surplus that remains after deducting the 
whole cost of production. But the difficulty consists in calculat- 
ing just what make up the cost of production. 



WHAT CONSTITUTE PROFITS 417 

The cost of production includes : — 
(i) Wages — the amount paid the laborers. 

(2) Interest — the amount paid the persons who furnish the 

capital. 

(3) Land Rent (according to some economists, to be included) 

— the amount paid for the renting of the land on which 
the business is carried on. 

Thus, the three factors of production — land, labor, and capi- 
tal — must first take their shares before we can calculate the 
profits of the manager. But it may happen, and very frequently 
does happen, that the manager is also the contributor of land, 
labor, and capital to the business. He contributes the land 
which he owns in his own right. He contributes all or a great 
share of the capital employed in the business. He contributes 
his labor as overseer and director, and his labor is greater and 
more important and more productive than is the labor of any 
other employee. 

The manager should receive, therefore, rent for his land, in- 
terest on his capital, and wages for his labor. And the amounts 
he is to receive under these several heads may be calculated by 
estimating what he would have to pay to landlord, capitalist, 
overseer, if these persons were distinct from himself. The 
equity of this arrangement cannot rightly be questioned. For 
if these sums must be paid and reckoned up in the cost of pro- 
duction, it cannot change matters because these individuals, 
landlord, capitalist, and employee, happen to be one and. th$ 
same with the manager. 

Indeed, in such a case, some would have his rate of interest 
increased above the current rate, because the return for his 
capital is variable depending on the state of business, whereas 
the income arising from loaned capital is fixed. 

Again, they would allow the salary or wages to be greater than 
the salary or wages paid to a hired overseer, because of the 
greater interest and greater mental strain felt in one's own busi- 
ness than could be experienced by any outside third person. 

These various items having been deducted from the product 

POL. ECON. 27 



41 8 PROFITS 

of the business, the surplus, if indeed any remain, will constitute 
the profits, and will go to the manager as the manager's peculiar 
share in the distribution of the product. 

That profits, however, will not be great in businesses where 
absolutely unrestricted competition exists, is declared by many, 
and Professor Walras went so far as to say that " the normal rate 
of profits is zero." He goes on the supposition that the price 
which the entrepreneur pays in the way of cost of production, 
including the amounts paid to himself as stated above, must neces- 
sarily be equal to the price for which he sells the finished product. 
In other words, because of the strong competition existing in 
every form of business, the price of the commodity will be equal 
to or very little above the cost of production, and consequently 
profits in the strict meaning will be little or nothing. 

When, however, the business is protected by being a monopoly, 
there is no doubt that its profits may be very great, whether be- 
cause the price of the product may be artificially set high, as, 
for example, through the possession of legal rights and franchises, 
or of rare natural agents, or through capitalistic organization ; or 
because, through new inventions and new machinery and more 
saving methods, the cost of production may be considerably les- 
sened without any lowering of the price of the product. 

Even where there exists no monopoly and where perfect com- 
petition obtains, we incline to the view that, while there are a 
great many business concerns which merely make expenses and 
only just cover the cost of production, there are many which 
reap profits more or less large, depending among other things on 
the ability of the manager of the business. The reason for this 
will appear presently. 

Principle Regulating Profits. — The successful conduct of 
business under free competition is due to two main things — 
exceptional abilities or exceptional advantages. 

Of these two factors, the more important is the former, — ex- 
ceptional abilities. The great majority of business houses which 
have become famous in the commercial world owe their rise to 
the remarkable abilities of their founders, who have won success 



PRINCIPLE REGULATING PROFITS 



419 



with little or no help from opportunity. And there have been 
many houses once famous, which, in spite of fortunate oppor- 
tunities, have lamentably failed upon the retirement of the great 
captain of industry who started them and carried them on to 
great prosperity. We may, therefore, for the sake of simplify- 
mg the matter, consider that success in business arises from 
exceptional abilities. 

The principle usually advanced to explain the existence and 
the amount of profits is similar to the principle propounded by 
Ricardo in explanation of rent. 

In the case of rent, we had different grades of land due to the 
different degrees of fertility of the land, and we had land which 
lay on the margin of cultivation, was cultivated because it paid 
interest and expenses, but was called no-rent land, paying no 
rent to the landlord. The moment a parcel of land arose above 
the no-rent category, it became rent land and paid an amount of 
rent proportional to the degree in which it surpassed in fertility 
and proximity to the market the no-rent land. 

In the same way with regard to profits, we can conceive all the 
various business concerns in the world, in a state, or in a com- 
munity, of whatever nature they may be and whatever their 
product, to be in existence for the purpose of supplying the de- 
mand for their products. This is a true conception. The 
business concerns in existence exist for production. The ulti- 
mate reason for their being is the demand for their products. 

Now, if all these concerns were just numerous enough and able 
to supply the demand, and if the several managers of them were 
possessed of the same abilities and the same degree of abilities, 
then all these concerns competing unrestrictedly among them- 
selves would reduce the returns to so low a figure that there would 
be no profits at all among them, but all would be carried on for 
the sake of the expenses, including all the items before enumer- 
ated. It would of course be profitable to conduct businesses of 
this kind, but there would be no " profits," technically so called. 

There would be here the no-profits stage of industrial society, 
which corresponds to the no-rent stage which is found to exist 



420 PROFITS 

when all the lands under cultivation are still ungraded and suffi- 
cient to supply the whole demand for food. 

But, as a matter of fact, no such state of affairs exists. Busi- 
ness concerns may be graded in different classes, and the main 
factor contributing to this grading will be the abilities possessed 
by the different managers, or entrepreneurs, who direct the 
businesses. 

We may, for the sake of convenience, divide the entrepreneurs 
into four classes or grades. 

1. There are those rarely gifted persons who seem to have the 
Midas gift of turning everything they touch into gold; whose 
commercial dealings have the appearance of magic ; who are 
gifted with remarkable foresight and deal in the future as if it 
were the present ; who are of so resolute and firm a temper that 
they stand unmoved by apprehension, alarms, and even repeated 
shocks of disaster ; " who have such command over men that all 
with whom they have to do acquire vigor from the contact and 
work for them as they would not, perhaps could not, work for 
others." But few belong to this first grade, though we may 
mention Cornelius Vanderbilt I, A. T. Stewart, Hill, Harriman, 
Carnegie, J. P. Morgan, as members of it. 

2. In the second grade there is a much larger class of busi- 
ness men, of a high order of talent though without genius, men 
of natural mastery, sagacious, prompt, and resolute. 

3. In the third grade are the men w^ho do fairly well in business, 
who possess in fair degree the qualities which go to make the 
successful entrepreneur, in whom, however, some mental or 
moral defect tends to impair these qualities, men who stand 
often on the brink of danger and failure, yet avoid it by care and 
diligence. 

4. In the lowest grade are the more or less incompetent busi- 
ness men. This clasG is well described by a writer: " Lower 
down in the industrial order are the multitude of men who are 
found in the control of business enterprises for no good reason ; 
men of checkered fortunes, sometimes doing well, but more 
often ill; some of them perhaps filling a place thai would not 



PRINCIPLE REGULATING PROFITS 421 

otherwise be filled, but more commonly in business because they 
have forced themselves into it under a mistaken idea of their 
own abilities, perhaps encouraged by the partiality of friends 
who have been willing to place in their hands the agencies of 
production, or intrust them with commercial or banking capital. 
The industrial careers of these men are not peculiarly happy, 
though the degree in which they suffer from the constant im- 
minence of loss, perhaps of bankruptcy, is very much a matter 
of temperament. Some take it extremely hard, and when they 
fall make no effort to rise again ; others are irrepressible as Har- 
lequin, jumping up, alert as ever, after being apparently hanged, 
drawn, and quartered by the common executioner." (Walker, 
Political Economy, p. 238.) 

These are the four grades of managers of business, diversified 
by reason of the abilities possessed by them. Now, the demand 
of product is great enough to keep all these classes in actual 
operation supplying the demand. Otherwise, the business con- 
cerns would not continue to do business. But the returns from 
the several grades will be very different in amount. The lowest 
grade will receive returns, which, taken in the average, will at 
least pay the expenses incurred in running the business — wages 
to employees, including the manager's wages or salary, interest 
on capital, rent for land. We say, taken in the average, be- 
cause, although in one year there may be a loss, in the next 
there will be gain sufficient to counteract the loss. 

Again, we said that the returns in this lowest grade will at 
least pay the expenses, for we cannot suppose that a business 
would be run during any continued period at a loss. 

This grade of business managers may be called the no-profits 
grade. If any profits at all exist, they will be so small that in 
our calculation they may be neglected. It will pay the managers 
to run the businesses, because after all they receive for them- 
selves the salary they could claim were they to hire themselves 
out to other employers to oversee their business for them. 

In the third grade, where managers of greater ability direct the 
concerns, varying rates of profits will be received, and large for- 



422 PROFITS 

tunes may in time be accumulated. In this grade we have the 
beginning of profits. 

In the second and first grades, the profits will be proportion- 
ately larger with the greater and higher abilities possessed by 
the managers. 

Under the first-grade managers, especially, the profits will be 
enormous and rapid and vast fortunes will be made. 

In many forms of business carried on to-day, the capital is 
supplied by persons who buy the shares of the concern. The 
shareholders appoint a manager or superintendent to conduct 
the business, and they control the actions of the manager 
through a board of directors. The manager in this case is 
not the manager, or entrepreneur, in the technical sense. He 
ranks as a skilled laborer and receives a fixed salary for the 
work he performs. His salary or wage is commensurate with 
his ability displayed in the management of the business. He 
receives no share in the profits as understood in the technical 
sense. The profits are distributed among the contributors of 
the capital, the shareholders, in the form of dividends. In busi- 
nesses conducted after this manner, it is difficult to distinguish 
between interest and profits. When the dividends paid the 
shareholders amount to 50 or 60 per cent of the capital con- 
tributed, it would be wrong to classify such returns as interest. 
The part of the returns that could be rightly classed as interest 
would be a portion equal to the average rate of interest paid 
in the country by money invested. The rest is profits and 
goes to the capitalists, who are really the managers and direct 
the business through the superintendent they have appointed. 

Relation between Profits and Wages. — It is claimed by 
many that, if a close study be made of the relations that exist 
between profits and wages, it will be found that profits have 
nothing to do with fixing the amount of wages paid the laborer, 
that the exceptionally high profits are not the cause of low wages, 
and, finally, that it cannot be said that profits are taken out 
of the wages of labor. We shall endeavor to understand these 
statements thoroughly, since they have very broad consequences. 



RELATION BETWEEN PROFITS AND WAGES 423 

The demand for product is so great that it requires for the 
supplying of that demand the existence and the productive 
work of the four grades of business concerns A^ B, C, and D; 
A representing the highest grade, D the lowest or no-profits 
grade. The product is the same, whatever the grade from which 
it comes. 

Now, the lowest grade D must pay its laborers wages sufficient 
to get laborers to work. The wages form an important item in 
the cost of production, and because the cost of production is as 
great as it is, the grade D can have no profits. The returns 
simply pay the cost of production. 

Profits here have nothing to do with fixing the amount of 
wages, since there are no profits. Thus, the wages of the thou- 
sands of laborers who are employed by business employers be- 
longing to grade D, the lowest industrial grade, are in no way 
affected by profits. 

Those employers can pay no higher wages, because, if they 
were to increase the cost of production by increasing the item 
of wages, they could not longer carry on business. The cost of 
production is at present so high that it excludes all profits and 
allows merely the payment of the necessary expenses incurred 
in conducting the business. Thus, it is this no-profits grade 
which fixes the standard of wages. 

The employers in the higher grades pay their laborers the 
same wages as are paid by those of the lowest grades. They 
find labor at its market value, and they are not obliged to esti- 
mate it at a higher value and pay a higher price for it, simply 
because they happen to have greater abilities than the incom- 
petent employers of the lowest grade, and can reap success and 
profits where others extort but a mere livelihood. 

The higher grade employer effects his success " by his careful 
study of the sources of his materials ; by his comprehension of 
the demands of the market ; by his steadiness and self-control 
in the presence of temptations to extravagance and wild ventures; 
by his organizing force and administrative ability, by his energy, 
economy, and prudence." 



424 PROFITS 

The laborers who work for such employers are not entitled to 
receive higher wages because of the fact that they are laboring 
under strong, enterprising, energetic men rather than under 
weak, irresolute, careless men. The labor is the same under 
each, the product is of equal quality in each concern, the price 
of the product is the same. That which makes the difference 
in the returns, it is claimed, is the greater ability of the suc- 
cessful employer. 

As a matter of fact, it is the lowest grade of managers which 
hampers the uprising of the wage earner, for it is naturally the 
aim of this class to reduce as much as possible the cost of pro- 
duction, in order to increase its returns, to bring itself, if possible, 
into the category of the profit-bearing grade, and it reduces the 
cost of production frequently by reducing the wages as much 
as it dares, seeking out and employing the cheapest labor to be 
found in the market, engaging the lowest classes of immigrants, 
to whom, after the starvation wages paid them at home, even 
the present low wage is wealth ; employing in many cases 
women and children to do men's work. 

We said that it is the class D which determines the scale of 
wages received by the wage earner. Let us for a moment con- 
sider what would happen if the classes A, B, C were to raise the 
wages of their laborers, giving them a share of the profits they 
make. 

This rise in Avages would of course affect the D class. The 
cost of production would be universally increased. 

But, if the cost of production were thus increased by the 
general rise in wages, all the concerns in the D class now in 
existence and able to sui;vive, because, under present condi- 
tions, they can cover the cost of production, wages on the present 
scale included, would be forced to go out of business. If they 
went out of existence, the supply of the various products would 
be decreased by the amount of these products which is now 
supplied by this class D. The demand for products remaining 
the same, the result would be an increase in the prices of the 
various products. 



RELATION BETWEEN PROFITS AND WAGES 425 

This would cause a rise in the cost of living, for many of the 
products mentioned constitute the necessaries and the comforts 
of life. The cost of living increasing, the wages although in- 
creased would not have the same purchasing power as formerly, 
and the latter condition of the wage earner in general would not 
be a whit better than the former. 

Another consideration presents itself. If the present scale of 
wages were increased, thus increasing the cost of production and 
driving out of business the numberless concerns which make up 
the lowest grade Z), the thousands of laborers who find employ- 
ment in this grade would be thrown upon the labor market. 

These thousands of laborers would clamor for admission into 
the concerns belonging to the grades C, B, and A. But in these, 
at present, there is no demand for laborers. They have all they 
need. If these higher grades did not open their doors to the 
applicants for labor by extending their business and increasing 
their labor lists, there would be in the labor market a greater 
supply of laborers than would exist demand for them. As a 
consequence, competition would spring up among laborers, 
those out of employment offering their labor at lower prices than 
the prices paid to those in employment, and as a result the gen- 
eral scale of wages would decrease. 

The foregoing discussion of the relations between profits and 
wages is made wholly from the point of view of the employers. 
The conclusions arrived at rest on the supposition that labor is a 
commodity having its fixed market price similar to any other 
commodity and subject to the law of supply and demand. 

It must be borne in mind, however, that among the special 
qualities which the successful employer possesses, and which 
make for his great success, is to be found the ability to draw 
about him a better and a more efficient corps of laborers. His 
superintendence wilj have a disciplinary and an educational 
effect upon the class of laborers he employs, and while the great 
success he attains will be due primarily to his ability as a manager, 
it will be due secondarily and in no small measure to the greater 
efficiency of the workmen under him. This greater efficiency 



426 PROFITS 

itself is due indeed to the manager, yet it would seem but just 
that the laborers who have submitted to the discipline of the 
manager and have become more efficient under his guidance, 
should share in a portion at least of the large profits enjoyed by 
the successful manager. 

This matter will be treated again when we come to the sub- 
ject of wages. 

Objections to Profits. — Objections to profits as a feature of 
commercial life and to the entrepreneur were made many years 
ago by Robert Owen (1771-1858). He declared that profits 
were the fundamental cause of all economic ills. The Socialists 
as a body assert that the present system of economic life, the 
entrepreneur and the wage earner, is all wrong. 

The present system of employer and employee, of master, 
who owns all the product and can dispose of it as he pleases, 
reaping all the profits, and of man (workman, slave, wage earner) , 
who contributes only his labor, receiving wages therefor, and 
who has no claim to the products which his hands have made nor 
to the profits arising from the sale of them — all this system 
is merely an " historical category," a chance result of various 
forces evolved in the course of economic evolution, a feature 
built upon no necessary principle logically producing this re- 
sult, but merely a transient state destined to be itself superseded 
by other states more just and equitable to all parties. 

Karl Marx (181 8-1883) P^ts the Socialist objection most 
forcibly. {Capital, 1867.) The employer buys and sells. He 
buys the labor of the workman. He sells this labor transformed 
and made concrete in the shape of commodities. The labor has 
a certain value ; the commodity has a certain value. The 
commodity has taken ten hours of labor in its production. It is 
worth a labor coupon marked ten hours labor. The workman who 
has labored on that commodity for ten ho.urs should receive a 
labor coupon marked ten hours labor for his wage. (Observe 
that labor is the sole measure of value of all things, according 
to the Socialist theory.) The values of the labor put into the 
commodity and of the commodity completed are the same. 



MEANS PROPOSED TO DO AWAY WITH PROFITS 427 

Were the workman paid after this system, there would evidently 
be no profits. 

But the employer, says Marx, does not follow any such scale 
in paying the workman. He looks upon the workman as a 
machine, to be had for hire in the labor market, and he deter- 
mines his value as he would determine the value of any machine 
or commodity; namely, by the cost of production. The cost 
of production is in this case the expense necessary to make a 
workman and to keep him in condition to work. But a five- 
hour labor coupon may be able to cover this expense. The 
employer, therefore, pays the workman a wage valued at five 
hours' labor for ten hours' work, and as he sells the commodity 
which has consumed ten hours' labor for a value equal to a ten- 
hour labor coupon, he makes a profit on each commodity of 
five hours' labor. 

This explains, according to Karl Marx and the Socialists, 
these two facts patent in our present economic conditions, that 
the employers are reaping vast fortunes and becoming richer 
every day, while the laborers are ever struggling against poverty 
and barely making sufiicient for life. 

This statement of the case by the Socialists is intended to 
show that profit taking is in its very nature a crime, that it is 
in its essence a spoliation of the wage earner. It is built up, 
however, on the false theory that value is determined by labor 
alone, that every commodity is to be valued by the number of 
hours of labor put into it. If this conception of value is 
rejected, as it was by us in the discussion of value, the argument 
of the Socialists must fall. 

Of course there are evils in the present commercial system, 
but they are not all due to the existence of profits. If we would 
destroy profits as a feature in commercial life, we should be 
destroying the great personal incentive to production, and 
what is more serious still, we should be destroying the right of 
property, a right which, as our Ethics teaches us, is natural to 
man. 

Means Proposed to do away with Profits. — While not ad- 



428 PROFITS 

mitting that the profit-receiving portion of the community, 
the employers, are the sole cause of all the laborers' hardships, 
yet it must be granted that the employers have in many cases 
a baneful influence on the condition of the workman. Hence 
efforts have been made in several directions to do away with the 
employer as he now exists. Indeed, the Socialists believe that 
the day is coming when the employer will no longer exist in the 
commercial world, and they point to the many successful stock 
companies and corporations which appear to succeed without 
the entrepreneur, or employer. 

(i) Stock Companies. — In the stock companies there is no 
individual employer. In his place are a great number of stock- 
holders, who furnish the capital and accept shares in return. 
The profits of the industry, instead of going to one man, are 
distributed in the form of dividends among the multitude of 
shareholders. The direction and management of the business is 
intrusted to an employee, who receives no portion of the profits, 
except in so far as he may be also a shareholder, but is paid a 
fixed salary. The next step, according to the Sociahsts, will 
be to do away with the stockholders, let the government supply 
the capital, and then all the profits will return to the laborers in 
the industry. 

It must be noted, however, that nearly all these stock com- 
panies are managed and controlled financially by some one 
leading shareholder, who is really an employer, or entrepreneur. 
Furthermore, in those joint-stock corporations where no in- 
dividual shareholder appears to control the concern, the absence 
of the functionary known as the employer is the cause of decided 
inferiority. The hired superintendent is not as zealous as would 
be the employer whose whole interest is in the industry. There 
are absent the individual initiative and the feeling of personal 
responsibility which can be found only where the employer is 
in control of the business. 

(2) Profit Sharing. — Among the systems which have been 
tried as correctives of the all-profits-absorbing employer, we 
may mention profit sharing. 



MEANS PROPOSED TO DO AWAY WITH PROFITS 429 

Profit sharing is the system by which the wage earner is 
made a kind of partner with the employer. " Profits, instead 
of falling exclusively to the latter, are divided, according to 
some system of sharing, between employer and employees, the 
workmen thus receiving an addition to their regular wages, if 
the enterprise has been successful." (Gide, Principles of 
Political Economy, p. 644.) 

In France this system has been most successfully instituted. 
It was first carried out in 1842 by Leclaire, a Parisian house 
painter. There are now in France over one hundred establish- 
ments which have adopted this system. The largest is the Bon 
Marche, a department store in Paris which employs over three 
thousand persons and does a business of thirty millions of dol- 
lars a year. 

Under this system the profits are divided among the employees 
according to certain conditions determined in advance. Usually 
the division is made with reference to the amount of wages 
received and the time of employment. The profits are either 
paid in money or are placed to the credit of the employee in a 
savings bank or an insurance association. 

The objects aimed at by profit sharing are the following: — 

1. To reconcile labor and capital, and to increase the labor- 
er's dignity by transforming him from a mere productive in- 
strument into a partner. 

2. To increase the productivity of labor by stimulating the 
workman's activity, furnishing him an incentive for faithful 
work, and leading him to feel a direct personal interest in the 
success of the enterprise in which he is employed. 

3. To increase the laborer's income by adding to his ordinary 
wages (which continue to be devoted to his running expenses) 
an annual dividend that can be saved or used to meet extraordi- 
nary expenses. 

4. To avoid loss of employment by attaching the laborer 
more closely and more permanently to the enterprise in which 
he has a share. 

Profit sharing, as a system, has not met with the approbation 



430 



PROFITS 



at first anticipated. The Socialists do not approve of it, be- 
cause it would tend to perpetuate and sanction profits, which 
they hold to be an absolute evil, a robbery of the laborer by the 
employer. 

Economists of the conservative schools claim that the laborers 
have no right whatever to profits, since profits are the share of 
the product due to invention and superintendence, in which the 
laborers have no part. 

It may be said that the laborers have as much right to a share 
of the proceeds of a business as the shareholding capitalists 
have. When the profits of a business are great, the shareholders 
benefit by receiving an increase in the dividends. The income 
from their investment is increased. An identical process would 
be carried out with regard to the wage earners, if their wages 
were increased when the profits are great. 

The reasons advanced against this proposition are the follow- 
ing : — 

I. In a business run by capital furnished the entrepreneur 
by contributing capitalists, the capitalists can be aggressive and 
claim an increase out of the profits by the threat to take their 
money from the business and transfer it to some other concern. 
The employer does not wish to lose the present capital and thus 
be forced to go about searching for new capital. 

It may be said that the wage earner may also be aggressive 
and may threaten to withdraw his labor, unless he is granted 
an increase of wages. So he does, and hence the strikes. But 
the inconvenience arising from the withdrawal of labor is not so 
great to the employer in active business, as would be the with- 
drawal of capital. Labor may be obtained more easily than 
capital. There are thousands in the labor market to fill the 
places of the striking wage earners. Hence the frequent failure 
of strikes to gain their end. 

In stock companies the shareholders supply the funds neces- 
sary to the business. They are the real employers and man- 
agers who carry on the business through the directors they have 
elected. They alone as managers have a right to the profits of 



MEANS PROPOSED TO DO AWAY WITH PROFITS 



431 



the business and to any increase of profits that may arise 
through the efficient management of the superintendent. If 
they are not satisfied with the income they receive, they can 
withdraw their capital from the industry by going out of 
business. 

2. If the employers were to increase the wages of the laborers, 
when the profits are great, we should have the difficulties al- 
ready explained on a preceding page. 

3. Employers are frequently bound by an agreement not to 
raise the wages of their employees, so as to prevent the evils 
which would result to the lowest grades of industries, and al- 
though one employer might be able and wulMng to share his profits 
w^ith his employees in the shape of increased wages, he will be 
prevented from carrying out his good purpose through fear of 
the enmity of his fellow employers, w^ho may have it in their 
power to injure his business. No man is anxious to make 
himself a martyr even in a good cause. 

There are others who object to profit sharing on the score 
of the unequal risk w^hich is put on the employer and in which 
the laborer does not share. If the laborer is allowed to share the 
profits, when there are profits, ought he not also be compelled 
to share the losses, when there are losses instead of profits? 
When such a proposal is made, none clamors more loudly against 
it than the wage earner. He is willing to share in the advan- 
tages, but would not shoulder the disadvantages, and yet they 
who claim that the profits are in part due to the labor, the 
efficiency, the acquired skill of the wage earner, ought also to 
admit that the losses are frequently due to the carelessness in 
handling machinery, necessitating frequent and expensive re- 
pairs, the time loss, the inefficiency, the unzealous labor of this 
same wage earner. 

Again, it must be borne in mind that the employer is human 
and that the main motive which prompts him to make such 
strenuous efforts in the management of his business is self- 
interest. The hope of great profits, which will be all his own, 
actuates his zeal, his invention, his directive ability. Let it be 



432 PROFITS 

understood that his share in the profits is to be but that small 
part which must necessarily remain after the hundreds or even 
thousands of employees have received their proportionate share, 
and we must see at once that the motive and incentive to self- 
sacrifice and extraordinary effort no longer exist. No mere man 
will labor as zealously for an advantage which others must share 
as he will for an advantage which is all his own. Such is 
human nature, at least as it is found in the business world to- 
day. 

Finally, a diflficulty in profit sharing exists in the certainty 
that " suspicions are likely to arise regarding the employer's 
good faith in declaring the amount thus subject to distribution, 
unless the workmen or a committee of them are to be allowed 
such access to the employer's books and accounts as few business 
men would willingly concede." (Walker, Political Economy. 
Cf. Current Literature, April, 191 1.) 

(3) Productive Cooperation. — Another device for remedying 
the evils of the present system is the system called Productive 
Cooperation. 

" The aim of cooperation," says Walker {Political Economy, 
p. 343), " is to get rid of the employer and divide his profits 
among his former workmen, who are to become, for the future, 
self-employed; to organize themselves, in their own way, for 
industrial purposes, and carry forward production on their own 
account and at their own risk." 

The first cooperative society was founded in France in 1834 
by Buchez, a French publicist, and this system seems to have 
prospered more in France than elsewhere. 

In the United States, the first recorded cooperative association 
was the Boston Tailors' Associative Union, formed in 1849. 
It did not last long. In 1868, in Minneapolis, the coopers formed 
associations of this nature and were successful. Boot and shoe 
companies and producers of dairy products have found success 
in the system. 

The advantages aimed at by cooperation are : — 

I. The securing for the laboring class of that large amount of 



MEANS PROPOSED TO DO AWAY WITH PROFITS 433 

wealth which, as we have seen, goes annually in profits to the 
employer. 

2. The opportunity secured for the laborer to produce in- 
dependently of the employer. Under the present system, the 
employer determines the nature and the amount of the product. 
His interest alone decides these questions. If the industry 
entailed a loss to him, he could shut down part of the work and 
dismiss the laborers. Under the cooperative system, the interest 
of the many laborers might determine upon the continuance 
of production even in dull times, when the returns of the product 
sold at whatever it would bring would be preferable to nothing 
at all. 

3. The cessation of strikes. 

4. The workman would be incited to greater industry and 
to greater carefulness in dealing with materials and machinery. 

5. The workman would be encouraged to greater frugality 
and to greater saving, having the ready opportunity of investing 
his savings in his own business. 

6. Finally, the moral, social, and political character of the 
workman would tend to be improved '' by giving him a larger 
stake in society, making his remuneration directly dependent 
on his own exertions, and admitting him to a participation in 
the deliberations and decisions of industry." (Walker, Political 
Economy.) 

Notwithstanding these advantages, the obstacles that oppose 
the success of cooperative societies are many and serious. 
The following are the principal difficulties to be met with : — 

I. The want of economic education among the laboring 
classes. The laborers will ordinarily not have the ability to 
choose a manager capable of directing a business enterprise ; and 
if such a one be chosen, they will scarcely yield him the almost 
despotic power or recognize the need of that perfect submission 
to his orders which contribute much to the success of great 
industries as carried on at present. If the industry is small, it 
might indeed be possible to dispense entirely with the manager, 
for then all the laborers might as a committee of the whole 

POL. ECON< — 28 



434 PROFITS 

determine the several questions which enter into production, 
but such a scheme would be practically impossible in a large in- 
dustry, where hundreds and even thousands would be employed. 

2. The want of capital. Capital is an absolute necessity for 
production, and the larger the industry, the greater the amount 
of capital needed. But it is difficult to imagine where laborers 
could collect the sums necessary for production. Their own 
possessions are but small, and the security they could offer 
would scarcely be sufficient to engage capitalists to intrust 
them with their money. 

It may be suggested that the government supply the capital. 
But, besides the objection that this would be a direct step 
towards Socialism, such a course would be the worst kind of 
paternalism, and would tend to destroy utterly the spirit of 
self-reliance and independence essential to every self-respecting 
citizen. 

This experiment was, in fact, tried in France in 1848. The 
sum of $400,000 was supplied by the government to cooperative 
societies. Very little success resulted. Says Gide : " Nothing 
is easier than to waste money that is freely received, especially 
when the government is the donor." {Principles of Political 
Economy, p. 650.) 

3. Cooperative societies tend to reestablish the very institu- 
tions which they seek to eliminate, the class of employers and the 
wage system. When these societies have proved successful, very 
often they shut out all subsequent applicants for admission 
on the cooperative plan, hire laborers to whom are paid the 
current wages, and keep for themselves, the original founders, 
all the profits. Not infrequently the original cooperators sell 
out their shares at a profit, and some one individual more ener- 
getic than the others absorbs the entire concern and passes over 
to the ranks of employers. Thus the attempt at cooperation 
has missed its aim. 

These difficulties and many others have rendered the efforts 
at cooperation comparatively unsuccessful. It has met with 
most success when it has been limited to industries on a small 



QUESTIONS 435 

scale, in which the initial expenditure is small and which aim to 
supply the local market. 

After an experimental trial, in 1909-1910, of the cooperative 
system at the Furness shipyards in England, under which the 
employees were to receive 9 per cent of the sums invested by 
them in the business, and a proportionate share in the profits, 
the scheme was abandoned by vote of the employees, because it 
was inconsistent with the principles of trade-unions and tended 
to injure trade organizations. 

As things appear to-day, it seems that the employer, or entre- 
preneur, is a necessity in the business world, and that the time 
is not yet come for his supplanting. Indeed, as Walker says: 
" The power of the master in production — the captain of in- 
dustry — has steadily increased throughout the present century 
[the nineteenth], with the increasing complexity of commercial 
relations, with the greater concentration of capital, with im- 
provements in apparatus and machinery, with the multiplication 
of styles and fashions, with the localization and specialization of 
manufactures." 

QUESTIONS 

I. What is meant by the term " manager" ? What qualities should the 



manager possess 



? 



2. Explain what is meant by the term "profits" according to English 

economists; according to French economists. 

3. What constitute profits in a business? What does cost of production 

include ? 

4. Explain the principle that regulates profits. Give an illustration. 

5. Are the wages of laborers dependent in any way on the profits of a 

business ? 

6. What objections are made against profits by Socialists ? 

7. State the means proposed to do away with profits. 

8. What is a joint-stock company ? 

9. What is profit sharing ? What are the objects aimed at by profit sharing ? 
ID. What may be the reason why the capitalist receives an increase of 

interest on his capital when the profits of a business increase, while 
the laborer does not receive an increase of wages under similar cir- 
cumstances ? 
Ti. What is the aim of cooperation? What advantages is it alleged to 
possess ? What are the obstacles to successful cooperation ? 



CHAPTER XXIII 

WAGES 

Definition and Explanation. — Wages, in general, means the 
income received by a person in exchange for his labor. 

It is not, however, to be taken in its broadest sense as a re- 
muneration for any kind of labor, for the professional man and 
highly placed officials give their labor and receive a remuneration 
which is not called wages. Such remunerations are called fees, 
salaries. The laborer, then, who receives wages is to be limited 
to him who is hired and employed by an entrepreneur. 

Historical Sketch. — The present wage system is of compara- 
tively recent date. Under the family economy, the wage 
system scarcely existed. In former times all the work was done 
by slaves. 

In the earlier part of the medieval period, the Feudal System 
held sway. The productive forces were employed mostly in 
agricultural pursuits, and the labor was performed by the 
villains and the serfs for the benefit of the feudal lords and the 
upper classes composing the nobility. The condition of the 
serfs was but little removed from that of slaves. 

Opposition arose against the power of the feudal barons, and 
towns were formed, which depended immediately upon the kings, 
from whom charters were obtained. The kings themselves 
were wilHng to establish such chartered free towns, as they 
thereby secured for themselves aid and assistance against the 
encroachments and domination of the feudal lords. 

Gradually the towns grew. They opened their gates to the 
multitude of serfs who found existence under their feudal 
masters intolerable. Such refugees were gladly welcomed, and 
received the freedom of the town. 

The various industries were carried on by individual workers. 

436 



HISTORICAL SKETCH 437 

These in course of time formed themselves into guilds and 
crafts, which were partly religious and partly trade organizations. 
There were three classes among the tradesmen : — 

1. The Masters, who had passed through the lower grades 
and received the freedom of the town. They were allowed to 
produce the various commodities of their trades, and offer them 
for sale in their shops and at the fairs which were regularly held 
in the town. 

2. The Journeymen, who were really more than mere wage 
earners. They were closely allied to the masters, and aspired 
to become, and did become, masters in their turn. They worked 
for the masters and received for their labor a portion of the 
proceeds of the masters' product. Before becoming masters, 
they were frequently obliged to show their proficiency by turn- 
ing out a masterpiece. 

As time went on, the journeymen found it difficult to become 
masters, because of the increase of the masters by reason of the 
increased population, and because, frequently, the masters 
sought to prevent the greater addition to their ranks through 
fear that an increase in their number would reduce their profits. 

3. The Apprentices, who were obliged to serve under their 
masters for seven or ten years, and who received from them the 
necessaries of life and a small yearly pittance. After learning 
his trade, the apprentice became a journeyman. 

The guilds and crafts gradually came to an end during the 
sixteenth and seventeenth centuries. 

After the beginning of the sixteenth century, while the agri- 
cultural industry increased greatly, the manufacturing industries 
began the wonderful progress which has continued unto our own 
times. 

These industries were carried on mostly within the family. 
There were no large factories. The product was sold immedi- 
ately to the consumer ; there were no middlemen. 

In the eighteenth century came the mechanical inventions 
which have revolutionized the condition of the working class. 

In 1753 the shuttle was invented by Kay; the water frame 



438 WAGES 

by Arkwright, in 1769; the spinning jenny by Hargreaves, in 
1770; the muie by Crompton, in 1799. In 1785 the steam 
engine was utilized in the manufacture of cotton fabrics. 

All these and other factors brought about the Factory System, 
and introduced into the economic world the system of employer 
and employee. The invention of machinery adapted to every 
line of trade brought about the same feature in all the productive 
industries, and through the development of trade, both national 
and international, throughout the world, there came into exist- 
ence the capitalists and the gifted promoters, who became the 
contributors of the capital and the directors of industry, along- 
side of the wage earner, who contributed the labor. 

In the beginning of the present wage system and up to the 
middle of the nineteenth century, the condition of the wage 
earner was at its worst. The employees were treated as slaves, 
the lowest possible amount c " wages was given them, the sanitary 
conditions in factories were appalling, children of a tender age 
were made to work long hours for a mere pittance and lost all 
opportunities for mental or physical development, workrooms 
were overcrowded and badly ventilated, and thousands fell 
victims to the imperfectly guarded machinery. 

Efforts made by the working class to better their condition 
were frowned upon by governments. In England, in 1800, 
trade-unions were declared illegal by Act of Parliament, and only 
in 1824 was the act repealed. 

Changes for the better have occurred, however, during the 
past sixty years, due to trade-unions and systematic organization 
among laborers, and the labor laws and factory laws, which regu- 
late the hours of labor, affect child and woman labor, insure 
laborers against accident, sickness, etc., and secure hygienic con- 
ditions of employment. 

Since capital and labor are the two great immediate causes 
of all the product that is created, it might be thought that the 
capitalist and the laborer should be partners and have a share 
in the product. The course of events, however, has brought 
about the present state of things, where the capitalist owns all 



TIME WAGES; PIECE WAGES 439 

the product and the laborer sells his labor like any other com- 
modity for a contract price. 

There is an advantage in this for the laborer, for he has an 
assured wage independent of all business vicissitudes, while the 
capitalist or employer has all the cares of the business. There 
results an evil also, for the laborer loses all stimulus to pro- 
duction, and he is tempted to do as little as possible and to 
get as much as he can, thus having in view only the pay which 
he is to receive for his labor. As we saw, it was the aim of 
profit sharing and cooperation to overcome this evil. 

Time Wages ; Piece Wages. — Wages may be Time wages 
or Piece wages, — time wages, when a definite amount is paid 
for a definite period of labor ; piece wages, when the wages are 
determined by the quantity of work turned out by the laborer. 

Piece wages are in many industries more profitable to the 
laborer, and they insure a greater f; mount of efficiency in labor. 
In some hat factories it is possible for some of the more skillful 
operatives to earn as much as $18 a week, when paid by the 
piece. 

This kind of wages brings out a distinction between the more 
rapid and efficient workers and the slow and inefficient, and causes 
employers to discriminate against the latter. Frequently, too, 
the employer reduces the amount paid in piece wages as the 
operatives become more proficient. This reduction brings the 
wages down to what the employer conceives to be a more 
reasonable rate, but the less skillful workers thus find their 
wages reduced below a subsistence scale. 

Trade-unions often for this reason object to piece wages, and 
they either prohibit it altogether or oblige the union members 
to limit their efficiency to a definite amount of work. 

Real and Nominal Wages. — A Nominal wage means the 
actual amount of money paid the laborer for his labor. 

A Real wage means the amount of money paid the laborer, 
with reference to its purchasing power. 

A distinction should be made between real and nominal wages. 
The nominal figure of the wage has no significance in calculat- 



440 WAGES 

ing the financial status of the laborer. Money tendered as 
wages has significance only in so far as it will exchange for com- 
modities. A laborer works that he may live, that he may ob- 
tain a certain amount of the necessaries, the comforts, and the 
luxuries of life. The money wage he receives represents a 
certain amount of those necessaries, comforts, and luxuries. 

Causes of Differences between Real and Nominal Wages. — 
Walker (Wages Question, p. 13) shows that real wages may differ 
from nominal wages because of variations in the purchasing 
power of money, the form of payment, opportunity for extra earn- 
ings, regularity of employment, and duration of capacity to labor. 

(i) Purchasing Power of Money. — The purchasing power of 
money will depend on the supply of money. A certain amount of 
money is needed in circulation to carry on the commercial trans- 
actions of the community. When the supply of money in- 
creases, the value of money decreases, i.e. its purchasing power 
becomes less. When the supply decreases, the value of money 
increases, i.e. its purchasing powxr becomes greater. 

The effect will be found in the rise or fall of the prices of com- 
modities. The more money there is, the higher the prices ; 
the less money there is, the lower the prices. One of the 
reasons given to-day for the increase of prices and the greater 
cost of living is the great increase in the gold production 
throughout the world. 

The purchasing power of money will depend also on the 
scale of activity in the production of commodities. Other 
things being equal, when the supply of commodities increases 
greatly, the prices will fall ; when the supply of commodities is 
curtailed, the prices will rise. 

Producers may have it in their power to limit the output of 
their products, and thus keep the prices up to a high level. 
Recent investigations have shown this action on the part of 
many producers of food products, who, instead of putting their 
produce on the markets, stored it away in cold-storage vaults 
so as to prevent the fall in prices that would ensue were the full 
amount of produce to be turned into the markets. 



CAUSES OF DIFFERENCES 441 

(2) The Form of Payment. — The wages of the laborer may 
not consist wholly of money. Other things may be included in 
the actual wages received. Such things may be rent, which is 
allowed the farm laborer who cultivates the land of the employer, 
or is included in the wages of the factory employees who live 
in the houses built and let out by the company engaged in in- 
dustrial pursuits ; board, when the laborer on a farm is allowed 
his board free, or the employee in a factory may receive from 
the company stores a certain amount of the necessaries of life ; 
certain perquisites and privileges, which may be granted the 
laborer in certain forms of industry. (Cf. Yearbook Agricul- 
tural Dep't, 1910, pp. 194, 197.) 

(3) Opportwiity for Extra Earnings. — The conditions of 
employment may be such that the laborer can add to his real 
income by outside industry. It may be that in certain localities 
the children and the women of the family find occupation, which 
will serve to increase the sum total of the wages received by the 
family. Other sources of income may exist in certain families, 
as when money is saved and put in bank or invested in paying 
enterprises. 

(4) Regularity of Employment. — In some industries, employ- 
ment is intermittent ; in others, employment is continuous 
throughout the year. 

Unemployment is due in some cases to strikes, lockouts, 
the number of holidays observed by a people, the seasons, and 
in some instances to the nature of the occupation itself, as is 
the case with agriculture and the fisheries, which can be carried 
on during only a portion of the year. 

(5) Duration of Capacity to Labor. — The labor capacity of 
workmen in different occupations will depend much on the nature 
of the occupation. Some kinds of labor are by their nature so 
injurious to the health of those employed in them, that the work- 
ing period of the employees' lives is comparatively short. 

All these factors enumerated by Walker will affect wages, and 
any computation of the wages of a people or of a special class of 
laborers w^ould not be satisfactory if it ignored these very sig- 



442 WAGES 

nificant items. No real results could be obtained by the mere 
mention of the nominal wages received by the wage earner. 
Account must be taken of the real wages and of all the several 
factors that tend to increase or diminish real wages. 

Other things may affect real and nominal wages. For example, 

(6) Amount of Wages and Value of Product. — Wages, 
though nominally high, may be really low if consideration be 
given to the relation between the amount of wages and the money 
value of the product turned out by that labor. Thus, when 
hand work was more in use, it might have taken ten men one 
month to turn out looo articles of a certain kind. After 
machinery was introduced, ten men working with machinery 
may have been able in a month's time to turn out 10,000 
similar articles. 

If the ten hand workers received $600 for the month's wage, 
and the ten machine workers $800 for the same time of labor, 
it would appear that the latter were receiving higher wages 
than the former. Yet, while the wages of the machine workers 
are nominally higher, they are really lower than the wages paid 
the hand workers, if we consider the value of the product. For, 
if one dollar represents the price of the commodity, the product 
when sold will bring to the former business $1000, and to the 
latter, $10,000. The wages in the former case amount to $600 
per month ; the wages in the latter case amount to $800 per 
month. The proportions 600 to 1000 and 800 to 10,000 represent 
respectively in both cases the relations of wages to gross receipts. 

The wage burden of the second business concern is much 
lighter than that of the former, and labor, though paid a higher 
nominal sum in the second case, is really cheaper than the labor 
in the former case. Thus, high wages do not always mean dear 
labor. (Cf. Atkinson, What makes the Rate of Wages?) There 
may even be great economy in high wages, due in great measure 
to the greater efficiency of labor resulting from the increased 
physical well-being of the laborers. (Cf. Hobson, The Evolu- 
tion of Modern Capitalism, ch. X.) 

(7) Hours of Labor. — In estimating the amount of wages and 



CAUSES OF DIFFERENCE 



443 



especially in making comparison of the wage scale in different 
industries and among different peoples or different classes of 
laborers, account must be taken of the number of hours which 
constitute a day's labor. 

The same nominal wage paid to two men is not really the same 
if one man works eight hours a day, and the other ten or twelve 
hours. Nor will the total wage gained by the family be the 
same where there are restrictions put on certain members of the 
family in regard to their labor. 

Many states have laws relative to the number of hours of 
labor of women and minors. In some states, sixty hours are 
prescribed as the maximum number of hours per week for the 
labor of this class of workers. Recently several states have 
taken active steps in the regulation of such labor, as follows: 
Ohio and New Jersey prescribe 55 hours a week for the labor of 
women and minors; Massachusetts and Rhode Island, 56; 
New York, Michigan, and Delaware, 54 ; Kansas, Oklahoma, 
and North Dakota, 48 ; Maine, 58. 

With regard to adult labor in general nothing has been done 
by state legislatures. There is a tendency to make eight hours 
the maximum of hours of labor per day, but it is opposed, on 
the one hand, by many employers whose product would be 
thereby considerably limited, and on the other hand, by many 
of the laboring class for whom it would mean a reduction of 
wages and a restriction of their earning capacity. Progress 
has been made in this direction, however, in certain localities, 
where the eight-hour law has been adopted in regard to govern- 
ment employees and workers in specified kinds of labor, min- 
ing for example. 

(8) Standard of Living. — Attention should also be paid to 
the nature of the things which the wages of the laborer must 
procure for him; in other words, to the standard of living of the 
laborer. 

In different countries, the standard of living is very different, 
and the need of commodities varies considerably. It would be 
impossible to define a standard of living that would be the same 



444 WAGES 

for all laborers. The standards of the various peoples will de- 
pend on long-continued custom, on climate, on social require- 
ments. Even in the same country, as, for example, in the United 
States, the standards of living are different for different classes of 
laborers, and although there is a tendency for all to reach the 
same standard, it takes some time before the tendency is ful- 
filled. The newly arrived immigrants, who have been used to a 
low standard of life at home, continue for years perhaps to be 
content with the same standard here. The Japanese, the 
Chinese, and the natives of many Euro^pean countries are not 
easily or rapidly assimilated, and they preserve their native mode 
of life for a long period. 

It is conceded that the standard of living is higher in the 
United States than in foreign countries. The normal life of 
the American laborer demands certain things in the matter of 
food, lodging, clothing, and recreation, which cannot well be 
eliminated. There is in truth a danger that the standard as- 
pired to by the American laborer is unreasonable and extrava- 
gant. The customs of the country, which bring rich and poor 
into such close intercourse, tend to promote desires and habits 
and modes of life among the poorer classes far above the power 
of their incomes to supply. 

There is, however, a reasonable plane to which the laborer 
may rightly aspire, and it must be admitted that in our country 
this plane is higher than abroad. The things required by the 
higher standard will necessitate a greater outlay of money, and 
this expenditure, surpassing that of laborers in other lands, 
and reasonably required by the customs and the social conditions 
of the country, must be estimated in any comparative study of 
wages. 

Theories of Wages. — There is no problem so difficult as to 
find the law of wages, and none that has called forth so great an 
amount of literature. The law of wages should formulate the 
principles which determine the rate of payment for hired labor, 
and should indicate the causes of its rise and fall. We shall give 
the principal theories which seek to explain these facts. 



GENERAL LAW OF SUPPLY AND DEMAND 



445 



General Law of Supply and Demand. — The general law of 
supply and demand determines the price of commodities. An 
article will be valued according to the supply of that article in the 
market and the demand that exists for it in the same market. 

The demand remaining the same, the price of the article will 
be in inverse ratio to the supply ; the supply increasing, the price 
will decrease ; the supply decreasing, the price will increase. 

In similar manner, the supply remaining the same, the price 
will be in direct ratio to the demand; the demand increasing, 
the price will increase; the demand decreasing, the price will 
decrease. 

Any change in the interrelations of demand and supply will 
have a corresponding influence on the price of the commodity. 
An increase in both the demand and supply may preserve the 
relative positions of the two, and leave the price unchanged. 
An increase in the one factor, accompanied by a decrease in the 
other, will intensify the ultimate result of the correlations. 

This law is applied to labor and to the price of labor, i.e. to 
wages. The price of labor will depend on the demand for and 
the supply of labor. Labor is conceived as a commodity, and 
it follows the same law as any other commodity. 

The laborer may possess nothing else in the world, but he has 
his labor, his ability to do manual or mental work of some kind. 
As he must live, he offers w^hat he has in himself in exchange for 
the necessaries of life. He has something for sale on the market, 
his labor. The thousands of other laborers offer the same com- 
modity, and the aggregate of all these offers constitutes the sup- 
ply of labor. 

Just as there are different grades of excellence in a staple of- 
fered on the market, so there are different grades of excellence 
in labor. Labor may be unskilled labor or skilled labor, and the 
skilled labor may embrace numberless grades of efficiency de- 
pendent on the various trades and industries operative in the 
great scheme of production. The values of labor of different 
kinds will be affected by the supply of these different kinds of 
labor. 



446 WAGES 

Factors affecting Supply of Labor. — There are several factors 
which affect the supply of labor ; namely, the increase of the 
population by natural means and by immigration, the employ- 
ment of women and children, and the influence of labor unions. 

Population tends to increase itself by natural means in geo- 
metrical progression, and, from this fact alone, there is the pros- 
pect that the supply of labor is gradually tending to become so 
great that the value of labor will gradually diminish, and wages 
will fall to a low level. The calamitous tendency is counteracted 
by the facts that production may as gradually increase, and thus 
increase the demand for labor, and that the increase of popula- 
tion is arrested by death, disease, famine, and accidents. Ad- 
herents of the Malthusian doctrine would advocate that the 
positive checks to overpopulation are not sufficient to counter- 
act this tendency, and that a negative check, moral restraint 
with regard to marriage and the procreation of children, should 
be practiced. (This doctrine has already been discussed, and 
its impracticability and moral danger pointed out, on pages 
86,87.) 

Immigration, especially in a new and prosperous country, is an 
abundant source of the increase of the supply of labor. The 
population of the United States has increased greatly through 
this source. The opening up of new industries, the unbounded 
wealth of the country, which gave a wide field for the successful 
investment of capital, have attracted the labor of foreign lands 
and have filled the labor markets. Legislative measures have 
been taken in this country to restrict the importation of skilled 
labor, so as to prevent the reduction of the value of such labor in 
the market. 

Another factor which affects considerably the supply of labor 
is the admission of the labor of women and children. Since the 
introduction of machinery into factory work, many employ- 
ments not requiring a great amount of muscular strength can be 
filled by women and children. The several states of the United 
States have passed laws restricting the previously unlimited 
employment of women and children. 



GENERAL LAW OF SUPPLY AND DEMAND 447 

The labor unions have an effect on the supply of labor in cases 
where they set limitations upon the persons who shall be engaged 
by employers, determine the hours of labor, or restrict the out- 
put. 

" The restriction of the output of individual workers is ac- 
complished in several ways: by adopting a normal day and dis- 
couraging or prohibiting overtime; by limiting the daily task 
or the earnings of piece workers ; by discouraging or prohibiting 
the grading of time workers, and thus leveling wages ; by for- 
bidding piece work, time work, contract jobs, or the butty 
system ; and, in some cases, by encouraging the go-easy system 
of secret loafing or the 'adulteration of labor.' " {International 
Encyclopedia, ''Trade-Unions," by R. T. Ely and T. S. 
Adams.) 

Demand for Labor. — The demand for labor is represented 
immediately by the call of the employers for laborers to carry on 
the various industrial enterprises in which they are engaged. 
The employers desiring labor apply in the labor market, and 
seek to get labor at the lowest price at which the laborers are 
willing to sell. The demand will depend on the state of trade, 
on the degree of prosperity existing in the productive industries. 
When there is exceptional prosperity, there will be great de- 
mand for labor ; when trade languishes, there will be a falling off 
in the demand. 

Rate of Wages. — The rate of wages will depend on the rela- 
tions existing at different times between demand and supply. 
Any circumstances which affect these two factors, demand and 
supply, will affect wages. Where competition is wholly un- 
restricted, wages will naturally tend to reach the lowest level of 
valuation which will furnish the mere subsistence of the laborer. 
When the supply of labor is abundant, there will always be found 
large numbers who will be willing to offer their labor at very low 
prices, and these will tend to make a general low average rate of 
wages. 

The rate of wages will not, however, be the same throughout 
the extent of even one country, for, while there is a certair 



448 WAGES 

mobility to labor, whereby it moves about from place to place, 
depending on the attraction of higher wages, many influences 
exist to prevent this mobility from being absolute. 

A great number of laborers are confined to one locality through 
the want of funds sufficient to enable them to obey the call of 
higher wages from some distant locality. 

Many are so attracted by the allurements of city life that 
they prefer to work for low and uncertain wages in the crowded 
city industries rather than to accept the really higher wages of 
a country occupation. 

Habit, defective education, and want of energy will prevent 
many from leaving the fields they are accustomed to, and will 
cause them to fill up the overcrowded markets, with the result 
that wages cannot rise. 

Trade-unions could affect the general rate of wages by deter- 
mining a minimum rate at which their members would offer their 
labor to the employers. They have indeed accomplished much 
in this respect, but their efforts are necessarily restricted by the 
fact that but a comparatively small percentage of the labor force 
in the country belongs to the unions. 

The rate of wages is, of course, affected by every increase in 
the supply. Where there is a continual accession from abroad of 
low-grade laborers, who are content with low wages, or where 
women and children compete with men, the scale of wages will 
be kept low. If women and children could be kept out of the 
field of competition, and if the inroads of the foreign element 
could be prevented, the wages of the remaining men would con- 
siderably increase. 

The law of supply and demand, as applied to wages, is, as 
Gide says, abandoned to-day by many, because it " lacks scien- 
tific precision and completeness." {Principles of Political Econ- 
omy, p. 496.) 

Wages-fund Theory. — The wages-fund theory supposes a 
fund, whether in actual permanent existence or in continuous 
flow, from which are drawn the wages paid to all laborers. 

This fund is created by production both present and past, and 



WAGES-FUND THEORY 



449 



consists of the total amount of wealth that is devoted to present 
or future production ; in other words, of capital. 

The wages-fund theory is the theory of the Classical School. 
It is the law of supply and demand more precisely stated. Sup- 
ply is represented by the laborers who hire out their labor; 
demand is represented by the capital that is employed in pro- 
duction. The whole amount of capital in the country is one 
factor. The whole number of laborers in the country is the other 
factor. The rate of average wages will be determined by the 
ratio between these two factors. If we divide the capital by the 
number of laborers, we obtain the average rate of wages in the 
country. 

J. S. Mill puts the theory thus: " Wages depend mainly upon 
the demand and supply of labor ; or as it is often expressed, on 
the proportion between population and capital. By population 
is here meant the number only of the laboring class, or rather of 
those who work for hire, and by capital, only circulating capital, 
and not even the whole of that, but the part which is expended 
in the direct purchase of labor." 

And further: " Wages (meaning, of course, the general rate) 
cannot rise but by an increase of the aggregate funds employed 
in hiring laborers, or a diminution in the number of the competi- 
tors for hire ; nor fall, except either by a diminution of the funds 
devoted to paying labor, or by an increase in the number of 
laborers to be paid." (Political Economy, Vol. I, pp. 328, 

329-) 

Ricardo declares that " the market price of labor is the price 
which is really paid for it, from the natural operations of supply 
and demand. Labor is dear when it is scarce, and cheap when 
it is plentiful." (In T. Brassey, Work and Wages.) 

The wages cannot at any time be greater than is warranted by 
the sum total of the capital. If more wages are given to any 
one kind of laborers or to the laborers in one district, less wages 
must be given to the other kinds of laborers or to laborers in 
other districts. 

Causes of General Rise of Wages. — A general rise in wages 

POL. ECON. — 29 



450 WAGES 

would be due to two causes: an increase of the capital, or a de- 
crease in the number of laborers. 

An increase of the capital could be brought about by an in- 
crease in the output of production, by greater prosperity in the 
various industries, which would add to the sum of wealth from 
which a portion could be set aside as an addition to capital ; or, 
by a greater degree of saving on the part of capitalists in the 
form of personal economies, and the c6nversion of the resulting 
wealth into capital. 

A decrease in the number of laborers could be brought about 
by any of the several means whereby the labor population would 
be lessened. Such means would be, according to the theorists, 
the Malthusian doctrine with its various kinds 'of checks to the 
increase of population, the arrest of immigration, the with- 
drawal of women and children from the field of labor. 

Defenders of the Wages-fund Theory. — The wages-fund theory 
was propounded by some of the most eminent economists. It 
was defended by Adam Smith, Malthus, Ricardo, J. S. Mill, 
Fawcett. It was generally accepted by English economic writ- 
ers during a great part of the last century. Modern economists 
have abandoned the theory. 

Objections to the Wages-fund Theory. — It is mere fiction to 
say that there exists a fixed and definite sum of capital 
obtained by past production out of which labor is paid. 
What portion of past wealth will be set aside as capital depends 
so greatly upon indefinite and indeterminate factors — for ex- 
ample, the condition of business, the activity of promoters, the 
'degree of sacrifice on the part of the owners of wealth, the will of 
capitalists — that it would be impossible to obtain a definite 
figure which could be called a wages-fund. 

It would be equally impossible to obtain any definite figure for 
the average rate of wages, because, while the so-called wages- 
fund is indefinite, the number of laborers is also indefinite, being 
subject to variable circumstances, such as the condition of in- 
dustry, the constantly changing accessions to labor, the will of 
the laborers to put their labor on the market. 



IRON LAW OF WAGES 45 1 

Moreover, the capital which is put into production is not all 
devoted to paying wages. Much of it is devoted to the estab- 
lishment of plants, to the setting aside of various kinds of 
reserve funds, to insurance, etc. Much is devoted to paying 
what are more technically called salaries. (Cf. Antoine, Cours 
d'economie sociale.) 

Finally, as Walker shows, wages are dependent on the prod- 
uct of present industry, and are paid out of the sum of this prod- 
uct. It indeed seems absurd on the face of it to think that 
wages in any industry could be determined by factors extraneous 
to the item of the value of the product of that industry. Al- 
though in some cases and in some degree, wages are paid out of a 
previously accumulated capital, yet, as a matter of fact, wages 
for the most part are obtained from the proceeds of the sale of 
present product, either actually acquired or advanced upon 
loans for which those proceeds are the security. (Cf. Walker, 
Wages Question, ch. IX.) 

Iron Law of Wages. — The Iron Law is the theory of the Social- 
ists, and it is strongly emphasized by them in order to show the 
injustice and the hardship of the present social conditions, and 
to hasten the day of the acceptance of Socialism as the only 
possible remedy. 

It is an application of the theory of supply and demand. 
Labor is conceived as a commodity. Its price is determined, 
like that of any other commodity, by the cost of production. 

The laborer according to this theory is a machine. What is 
the expense incurred in the case of a machine in a workshop, 
supposing the machine to be offered free to the employer? 
Evidently, the cost of running the machine, of keeping it in 
good working condition, of keeping it in repair, of supplying its 
place with another machine when the old one has exhausted its 
utihty. 

The laborer is conceived to be just such a machine. He presents 
himself to the employer and is installed in a certain place in the 
factory. He must live and keep up the strength necessary to 
perform his work. His wages must be at least sufficient to keep 



452 WAGES 

him alive and to give him the strength required for labor. It 
must be sufficient to enable him to produce a successor to him- 
self in the same work. 

What the actual amount of wages will be is determined by the 
supply of labor relative to the demand. It cannot fall for any 
length of time below the point where the wages will sustain the 
laborer, for' if it did, the supply of laborers would be decreased 
by disease, famine, death, emigration, the reduction of offspring, 
and, the supply diminishing, the demand would be relatively 
greater and would cause the price of labor to rise. 

On the other hand, according to the iron law, wages cannot 
rise for any length of time above the sustenance point, because 
the improved condition of the laboring class, under the increased 
wage, would bring about an increase of marriages and an in- 
crease of laborers, and, in the case of any one particular country, 
an accession to the ranks of labor from other lands, where the 
wage increase had not been made, and, as a result of this increase 
in the supply of labor, the price of labor would fall again to the 
sustenance level. 

Sustenance may mean the maintenance of life, so far as to keep 
body and soul together, or it may mean the maintenance of life 
in that condition called for by the standard of life habitual to the 
laborer. This standard may be different among different peo- 
ples. If the standard be such that it includes all the necessaries 
of life, most of the comforts, and some of the luxuries, and if the 
wage be sufficient to keep the laborer up to such a standard, 
the theory goes beyond the purpose of the Socialist inventors and 
ceases to be the law of iron. 

The standard of living is, therefore, represented as being that 
enforced standard wherein merely a bare subsistence is received 
through the wages offered to labor. The Socialists point to the 
prevalence of poverty among the great mass of mankind, to the 
fact that the great majority of wage earners are obliged to ac- 
cept a wage wholly inadequate to the maintenance of any stand- 
ard above that of mere sustenance, as a patent verification of 
their theory, the law of iron. 



PRODUCTIVITY THEORY OF WAGES 453 

It has served in their hands to intensify the enmity between 
the capitalist class and the labor class, and to argue the neces- 
sity of Socialism as the only means of helping the masses of the 
people. 

Objections to the Iron Law of Wages. — The theory is rejected 
by all who are not Socialists, because it does not explain existing 
facts. 

Wages are not the same in all trades, nor are they the same in 
all countries, and yet the level of sustenance does not vary to 
such an extent as to require more for one kind of laborer than 
for another, or for one nationality than for another. Other 
factors besides sustenance seem to influence the rate of wages. 

Moreover, perfect competition is supposed to exist in the 
operation of the law, and yet at the present time, and indeed at 
all times, there are and have been many causes which have pre- 
vented perfect competition. Among such causes have been the 
legislative measures of different governments affecting wages, 
limiting immigration, determining the hours of labor, restricting 
the labor of certain kinds of laborers ; the trade-unions, the reg- 
ulations of which often determine the number of laborers and 
the nature of their labor, and the limit of wages for which they 
may work. (Cf. Gide, Principles of Political Economy, p. 502.) 

Productivity Theory of Wages. — Production is occupied in 
turning out a certain amount of product. The product is sold, 
and the proceeds go to pay each of the factors of production. 

Part will go to the landowner, who has furnished the land; 
part to the capitalist, who has given the capital ; part to the 
employer, who has directed the industry ; and part to the laborer, 
who has given his labor. 

The product, therefore, according to the productivity theory 
of wages, is the source of all the returns which go to the several 
factors of production. The returns which go to land, capital, 
and employer are fixed and determined by laws. The part 
which goes to labor is determined by the law of the productivity 
of labor. 

Wages arise because labor is productive of a product which 



454 WAGES 

can be estimated in money value, and has a right to a certain 
portion of the proceeds. The other factors have their claims 
upon the proceeds. Labor, in like manner ; and the amount of 
the proceeds which goes to labor, according to this theory, will 
be the sum of the proceeds remaining after the other factors 
have received their shares. The amount of the proceeds that 
may be distributed in wages will depend on the degree of the 
productivity of labor. The more efficient the laborers, the 
greater will be the sum total of the proceeds, and the efficiency 
will be increased by all the several factors which help towards 
the increase of the product. 

Objections to the Productivity Theory of Wages. — This theory, 
proposed principally by Walker in Wages Question, is opposed by 
many as too optimistic and as contrary to facts. 

The productivity of labor has increased immensely during the 
past century, owing to the introduction of machinery, the in- 
creased intelligence and proficiency of the laboring class, the 
application of inventive genius to mechanical contrivances, and 
other causes, but the increase of wages has not been at all in 
proportion to the growth of productivity. 

Again, although the proceeds of production have increased 
considerably, the actual share of labor in the proceeds has not 
proportionately augmented. The working out of the law of 
productivity, whereby with an increase of the proceeds of pro- 
duction a greater share ought to go to labor, has been defeated by 
trusts and combinations of capital, and by aggressive competi- 
tion among employers, so that the lion's share of the augmented 
proceeds is absorbed by the employing class. 

If it be said that the theory does not actually explain existing 
facts because the condition of full and complete competition is 
not adhered to, the theory becomes a mere fanciful doctrine of 
no practical use. 

Catholic Doctrine of Wages. — Prevalent View of the Laborer. 
— The general view taken of the laborer is to conceive him as an 
individual offering something for sale. He offers his labor. A 
contract is entered into between the employer and the laborer. 



CATHOLIC DOCTRINE OF WAGES 455 

The contract calls* for a certain amount of labor on the part of the 
laborer, so many hours of work during a day or a week, or some 
particular kind of work to be accomplished under definite condi- 
tions, and on the part of the employer a definite sum of money, 
which shall be paid the laborer on the completion of the work. 

No other consideration is generally supposed to enter be- 
tween the employer and the laborer save the legal obligation im- 
posed by the contract that has been willingly agreed upon by 
both parties. The work accomplished, the wages are paid, and 
the transaction closes. 

The Catholic View represents the laborer as endowed with 
personal dignity. He is a person possessed of certain character- 
istics of mind and heart, an intelligent and a free being, owing 
allegiance to God, raised to a supernatural order, destined to a 
spiritual and a supernatural end, gifted with certain inalienable 
rights which his fellow man must recognize and respect. 

In contracting to sell his labor, he cannot divest himself of his 
natural dignity. While the intellectual and moral elements 
that enter into his composition do not come directly into the 
matter of his labor contract, which directly affects his actual 
material work, yet indirectly they do enter into the contract, 
since the laborer, in hiring out his physical force, includes in it 
his personality and his dignity as man, and cannot help but do so. 
(Cf. Th. Meyer, Institutiones Juris Naturalis, II, No. 248.) 

Hence, in the contract entered into between employer and 
laborer, there arise certain obligations in strict justice, on 
the part of the laborer, on the one hand, to fulfill exactly all the 
requirements of the labor contract, on the part of the em- 
ployer, on the other hand, '' to respect and safeguard the inalien- 
able rights of the laborer, such as the right to liberty of conscience, 
to life, to the preservation of health, to morality." (Antoine, 
Cours d'economie sociale, p. 318.) 

Source of Catholic Doctrine. — From this fundamental view 
of the laborer, there arises the Catholic doctrine of wages. The 
main source of the doctrine is to be found in the Encyclical 
Rerum Novarum of Pope Leo XIII. The Encyclical says:—:- 



456 ' WAGES 

" We now approach a subject of great and urgent importance, 
and one in respect of which, if extremes are to be avoided, right 
notions are absolutely necessary. Wages, as we are told, are 
regulated by free consent, and therefore the employer, when he 
pays what was agreed upon, has done his part and seemingly is 
not called upon to do anything beyond. The only way, it is 
said, in which injustice might occur would be if the master re- 
fused to pay the whole of the wages, or if the workman should 
not complete the work undertaken ; in such cases the state 
should intervene, to see that each obtains his due — but not 
under any other circumstances. 

" This mode of reasoning is, to a fair-minded man, by no 
means convincing, for there are important considerations which 
it leaves out of account altogether. To labor is to exert one's 
self for the sake of procuring what is necessary for the purposes 
of life, and chief of all for self-preservation. ' In the sweat of 
thy brow thou shalt eat thy bread' (Gen. iii, 19).. Hence a 
man's labor bears two notes or characters. First of all, it is 
personal, inasmuch as the exertion of individual strength belongs 
to the individual who puts it forth, employing such strength to 
procure that personal advantage on account of which it was be- 
stowed. Secondly, man's labor is necessary; for without the 
result of labor a man cannot live ; and self-preservation is a law 
of nature, which it is wrong to disobey. Now, were we to con- 
sider labor so far as it is personal merely, doubtless it would be 
within the workman's right to accept any rate of wages 
whatsoever ; for in the same way as he is free to work or 
not, so is he free to accept a small remuneration or even none at 
all. But this is a mere abstract supposition ; the labor of the 
workingman is not only his personal attribute, but it is necessary ; 
and this makes all the difference. The preservation of life is the 
bounden duty of one and all, and to be wanting therein is a 
crime. It follows that each one has a right to procure what is 
required in order to live ; and the poor can procure it in no other 
way than through work and wages. 

" Let it be then taken for granted that workman and employer 



CATHOLIC DOCTRINE OF WAGES 457 

should, as a rule, make free agreements, and in particular should 
agree freely as to the wages ; nevertheless, there underlies a dic- 
tate of natural justice more imperious and ancient than any bar- 
gain between man and man, namely, that remuneration ought to 
be sufficient to support a frugal and well-behaved wage earner. 
If through necessity or fear of a worse evil the workman accept 
harder conditions because an employer or contractor will afford 
him no better, he is made the victim of force and injustice." 

Sufficient Wage a Matter of Justice. — The wage of the la- 
borer, according to the Encyclical, is a wage " sufficient to sup- 
port a frugal and well-behaved wage earner," and this wage 
should be paid the laborer as a matter of strict commutative 
justice. There is thus established a minimum wage which the 
employer is bound to pay the laborer, and anything below this 
minimum wage will entail injustice on the part of the employer. 

Commutative justice is that division of justice which concerns 
individuals and demands equivalence between the object ac- 
cepted and the compensation given. In the present case, the 
object offered by the laborer is his labor ; the compensation given 
is the wage granted by the employer. 

There must be equivalence between the two, and the Catholic 
doctrine holds that such equivalence will exist only when the 
wage given by the employer is at least an amount '' sufficient 
to support a frugal and well-behaved wage earner." 

Personal Wage; Family Wage. — Difficulty arises when an 
attempt is made to determine what shall constitute this " suffi- 
cient " wage, as set forth in the Encyclical. The laborer may 
be considered as an individual or as the head of a family. Shall 
the sufficient wage mean a personal wage or a family wage ? — 
a wage sufficient to support the individual laborer, or a wage 
sufficient to support himself and his wife and children ? 

Several Catholic writers insist that the wage referred to in the 
EncycHcal and required by strict justice is a family wage, suffi- 
cient for the support not only of the laborer but of an actual or a 
possible family. 

A just wage is such as will enable a man to secure all that 



458 WAGES 

belongs to a normal and reasonable life, all that will conduce not 
only to self-preservation, but also to self-propagation. 

The married state is an essential condition of a man's normal 
life, and his remuneration as a laborer will not satisfy justice 
unless it is sufficient tq maintain a family. Normally, man is 
looking forward to marriage, if he is not already married, and 
hence the laborer, whether single or married, is in justice entitled 
to a family wage. (Cf . J. Ryan, A Living Wage, ch. VI.) 

Other Catholic writers, while not admitting that the wage 
mentioned in the Encyclical is the family wage, and while 
allowing that the family wage is not demanded by strict justice, 
hold that the laborer is entitled to a family wage on the ground 
of social order and the common good of society {titulo naturalis 
honestatis). 

Social order requires that the -members of society be able to 
fulfill their duties as heads of families; that families, the con- 
stituent elements of society, be enabled to live and propagate. 
The common good of society must certainly embrace the good of 
those who form the greater proportion of society. Hence, the 
wage received by the laborer must be sufficient for the sustenance 
of his family. (Antoine, Cours d^economie sociale, p. 606.) 

Amount of Just Wage. — Assuming that a personal wage is the 
wage in question and that it should be a living wage, further 
difficulty appears in determining what definite amount would 
constitute a living wage. 

No definite sum can be fixed on, for a living wage will differ 
in different lands, in different localities of the same land, in city 
and in country, and it will be further differentiated by the 
standard of living, the cost of living, the customs and habits of 
various kinds of laborers, and other circumstances already re- 
ferred to in a preceding part of this discussion of wages. 

Yet, although the problem presents difficulties, it should not 
remain an insoluble one. It should be possible to arrive at a 
figure that would prove a sufficient income for a laborer and 
enable him to obtain a just proportion of the necessaries, the 
comforts, and some of the luxuries of life. 



CATHOLIC DOCTRINE OF WAGES 459 

Great progress has been made in statistical studies in our day, 
and from such studies it has been learned that the major part 
of the working class are obliged to be content with a wage below 
a decent living wage. Through similar means it might prove 
possible to determine for various classes of laborers the amount 
that could reasonably be considered a just and sufficient wage. 

The most reasonable method of fixing upon a living wage ap- 
pears to be that proposed by Antoine {Cours d'economie sociale, p. 
603) ; namely, that it be decided upon by the employers and la- 
borers themselves after mutual deliberations and conferences. 

Suspension of Obligation. — It must be remarked that the 
doctrine of a living wage as referred to here will hold in normal 
industrial conditions. It may be that in a time of general in- 
dustrial paralysis employers would have to reduce wages or stop 
work altogether. In such cases the laborers should be content 
to receive a lower rate of wages rather than face the alternative 
of having no work at all. 

In cases where the returns of a business are very low, as in 
those industries which barely make expenses, viz., interest, rent, 
and a rate of wages lower than the living wage, — those indus- 
tries, in other words, which belong to the no-profits class, — it 
would be impossible to exact the payment of a living wage. In 
such cases, the obligation binding in justice would be suspended. 
Added hardship would be imposed on the laborers, if they were 
deprived of even the small wage such industries are able to pay. 

Can the just wage be fixed and determined with a view solely 
to the status of the laborer and irrespective of the other factors 
that enter into the production of wealth, and should the living 
wage be insisted on as a matter of justice, without any regard 
to cost of production, to amount of product and other factors, 
which affect production ? 

Low Wages Result of Distribution, not of Production. — The 
poverty of the working classes is, upon the admission of probably 
all economists, not due to production. During the past one 
hundred years, production has advanced with immense strides, 
and the increase has been remarkable. The evil is, therefore, not 



46o WAGES 

the result of production, but rather of distribution, or the man- 
ner in which the money proceeds of the product have been ap- 
portioned among the several factors that have contributed to the 
product. 

There is enough reasonably and justly to satisfy all these fac- 
tors, if reason and justice were allowed to affect the distribution ; 
but as a matter of fact the capitalist and the entrepreneur exact 
the greater share of the proceeds of production, and as a result, 
little is left to be distributed among the wage earners. 

Method of Establishing Just Wage. — We come now to consider 
the method by which the establishment of a living wage could 
be brought about. 

Direct Intervention of State. — Some writers advocate the di- 
rect intervention of the state, which by law would determine for 
all the various industries the minimum wage that could be paid 
by employer to laborer. If such a law were unconstitutional, as 
it would be claimed to be in the United States, the Constitution 
should be amended, assert these writers, so as to permit the 
passage of the law. (Cf. Ryan, A Living Wage.) 

While admitting that the state would in the abstract have the 
right to fix such a wage, on the principle that it is the right and 
the duty of the state to prevent injustice to any one or any class 
of the citizens, others object to the actual establishment by 
state law of such a minimum wage. Their objection is based on 
the following reasons : — 

1. The moral impossibility of fixing a definite living wage in 
the midst of the difhculties arising from differences of times, 
places, industries, country and city life, and cost of living. The 
law once made would have to be changed continually, because of 
the ever-changing conditions. 

2. The heavy burden imposed on employers, whose books 
would have to be examined in order to find out the returns made 
by the industries they were engaged in. 

3. The hardship resulting to the laborers themselves, who in 
times of industrial depression would have to forego even the low 
wages the industries were able to pay. 



CATHOLIC DOCTRINE OF WAGES 461 

4, The insurmountable obstacle arising from the fact that it 
would be impossible to obtain a universal and international law 
determining the living wage, and yet such a law would be neces- 
sary, on account of competition, through which countries with 
underpaid labor could produce at lower cost and undersell the 
countries enforcing the minimum wage. (Cf. Antoine, Cours 
d'economie sociale, p. 627.) 

Indirect Actio Jt of State. — Where direct intervention of the 
state is deprecated, because of the objections mentioned, and 
because such intervention would be an approach to Socialism, 
indirect action of the state is advocated. Such action of the 
state would take the form of 

1. Reduction of taxes affecting articles of general consump- 
tion ; more particularly in the United States, a modification of 
tariff imposts which prevent the free entry into the country of 
such articles of general consumption. 

2. Greater restriction of the labor of women and minors, 
thus reducing competition and opening up greater demand for 
the labor of men, and allowing an increase in the wages of men. 

3. Regulation of trusts and the prevention of combinations 
of employers, for the purpose of keeping wages low. 

4. Encouragement of agricultural pursuits, so as to increase 
the supply of the necessaries of life and thus diminish the cost of 
living. 

5. Extension of the Employer's Liability Act to all classes of 
laborers, and the enactment of such an act as would save the 
injured laborer or his family the tediousness and the expense of 
long litigation. 

6. Encouragement of trade-unions, and the enforcement of 
arbitration between employers and laborers in cases of strikes. 

7. Establishment of Labor Bureaus, v/hich would seek to find 
employment for the unemployed. 

8. Encouragement of Beneficial Societies, which could enable 
the unemployed laborers to tide over a period of enforced unem- 
ployment, and provide sickness and death benefits. 

9. Greater facilities for saving among the poorer classes 



462 WAGES 

through the increase of savings banks and the wide diffusion of 
the postal savings bank system. 

10. Encouragement of Industrial Insurance among the work- 
ing class, at such low rates that its advantages could be brought 
within the reach of all. 

Public Opinion. — Much could be done through the forming of 
public opinion, so that a greater degree of fairness and justice 
would be granted by the employer to the wage earner. Here 
lies a field for the Christian teacher, wherever he may be found, 
who, by constant insistence and enlightened doctrine, can bring 
home to the business man the propriety and the need of just 
dealings with the laboring class. 

Instances are not wanting, although lamentably few, of a grow- 
ing considerateness on the part of employers towards employees. 
The action of certain great railway systems in granting pensions 
to employees of long service, the social work at the Krupp foun- 
dries in Germany, the methods adopted for the betterment of 
employees in some of the great industrial establishments of this 
country, the spontaneous granting of increases of wages in many 
branches of industry in recent times, all indicate the awakening 
of a more kindly spirit and a sense of justice among the employ- 
ing class. 

QUESTIONS 

1. What is meant by wages? Who constitute the wage earners? 

2. Give a brief historical sketch of the rise and development of the wage 

system. 

3. What are time wages ? Piece wages ? Which is the better form of 

wages for the laborer ? 

4. What is the distinction between nominal and real wages ? 

5. Explain the causes that affect the real value of wages. Give practical 

examples where possible. 

6. State the different theories that seek to explain wages. 

7. Explain the law of supply and demand. What factors affect the 

supply of labor ? What represents the demand for labor ? How is 
the rate of wages determined according to this theory ? 

8. Explain the wages-fund theory. What are the objections to the 

theory ? 



QUESTIONS 463 

9. Explain the iron law of wages. What are the objections to the theory ? 

10. Explain the productivity theory of wages. Give the objections to the 

theory. 

1 1 . What is the prevalent view held to-day of the laborer ? Give a more 

reasonable and more just view. 

12. What are the sources of the Catholic doctrine of wages? 

13. What is a just wage according to the Encyclical of Leo XIII? 

14. What is meant by personal wage ? Family wage? 

15. What constitutes a sufficient wage? 

16. When is the obligation to pay a just wage suspended? 

17. What is the cause of low wages? 

18. State the objections to direct intervention of the state in fixing the 

amount of wages. 

19. How could the state indirectly relieve the condition of the working 

class ? 

20. What is the power of public opinion in this matter ? 



INDEX 



Absolute poverty, 377. 
Absolute rent, 393. 

Abstinence, in relation to interest, 409. 
Accident insurance defined, 358. 
Accidents from machinery, 93. 
Accounts, balance of, 239. 
Ad valorem duties, 242, 343. 
Adams, T. S., Trade-Unions, 447. 
Adulteration of labor, 447. 
Advertising of goods, 68. 
Advisory Council, federal, 176. 
Agrarian Socialists, 17, 
Agricultural School, 11. 
Agriculture, a source of wealth, 82. 

Physiocrats' theory of, 11. 
Aldrich, Nelson W., plan of banking, 

210. 
Aldrich- Vreeland law, 217, 
Alexander VII, Pope, 403. 

condemns loans, 403. 
Allison, on the fall of Roman Empire, 

150. 
Almshouses, 380. 
American Review of Reviews, 214. 
Anarchists, 19. 
Andrews, E. B., Institutes of Economics, 

34, 67. 
History of the United States, 196. 
Animal industries, 70. 
Annals of the American Academy of Politi- 
cal and Social Science, 163, 212, 223, 

229, 322. 
Antitrust laws, 319, 320. 
Antoine, Cours d' economic sociale, 2, 18, 

20, 25, 44, 66, 72, 124, 373, 394, 

451, 455, 458, 459, 461. 
Apprentices in guild system, 437. 
Aquinas, St. Thomas, Summa, 401. 
Arkwright, water frame invented by, 

.437, 438. 
Articles of Association, 177. 
Artificial monopoly, 62. 
Assessments, as sources of government 

revenue, 329. 
Asset currency, 215. 
Assignats, 112. 
Atkinson, What Makes the Rate of Wages, 

442. 
Austrian School, 12. 



Balance of accounts, 239. 
Balance of trade, argument for protec- 
tion, 269, 273. 

prosperity estimated by, 238. 

under mercantile system, 8. 
Bank, of Amsterdam, 194. 

of Antwerp, 194. 

of England, 227. 

of France, 216, 228. 

of Germany, 194, 216, 228. 

of Hamburg, 194. 

of Massachusetts, 198. 

of the United States, 195. 
Bank credit, 188. 
Bank notes, 178, 

Bankers' Association Commission, Amer- 
ican, 216. 
Bankers' bills of exchange, 163. 
Bankers' commissions, 240. 
Banking, Aldrich plan, 210. 

Aldrich-Vreeland law, 217. 

asset currency or credit currency, 215. 

branch, 212. 

defined, 171. 

emergency currency, 217. 

federal reserve system, 172, 218, 219. 

federated bank, 210. 

government guarantee of bank de- 
posits, 213. 

history of general, 194. 

history of, in United States, 195, 

in foreign countries, 227. 

national bank system, 200. 

plans for a central bank, 209. 

postal savings bank, 222. 
Banks, commercial, 171, 185. 

definition, 171. 

federal reserve, 171. 

federated, 210. 

foreign, 194, 227. 

functions of, 184, 185, 190, 191. 

independent treasury system, 204. 

inelastic currency of, 205. 

isolation of, 202. 

kinds of, 171. 

lack of, 209. 

land, 225. 

loan and trust companies, 182. 

member, 172, 173, 183, 185. 



POL. ECON. 30 



46s 



466 



INDEX 



Banks, national, 114. 

organization of, 172. 

origin of the national banking system, 
200, 202. 

postal savings, 222, 375, 462. 

reserves of, 203 . 

savings, 183, 191, 462. 

state, 182, 185. 
Barter, 105. 

Benedict XIV, Pope, Vix pervenit, 402. 
Beneficial societies, encouragement of, 

461. 
Berlin Decree, 248. 
Bill of lading, 164. 
Bills of exchange, defined, 162. 

instruments of credit, 160. 

kinds of, 163. 

origin and function of, 163. 

use of, 163, 238. 
Bimetallism, argmnents for, 140. 

defined, 134. 

historical sketch of, 135. 

kinds of, 134. 
Black Friday, 227. 
Bland-Allison Act, 138. 
Block, political economy defined by, 

5- 
Bogart, E. L., The Economic History of 

the United States, 250. 
Bon Marche, profit sharing in, 429. 
Bond issues, 346. 
Bonded warehouses, 343. 
Book credits, 160. 
Booth, Life and Labour of the People in 

London, 378. 
Boston Tailors' Associative Unibn, 432. 
Bottomry loans, 349. 
Bounties, 8, 246. 
Bourse, Paris, 47. 
Bradley, J. T., Practical Problems in 

Banking and Currency, 187. 
Branch banking, 212. 
Brandeis, L. D., Savings Insurance, 368. 
Brassey, T., Work and Wages, 449. 
Brigham, A. P., Commercial Geography, 
j 70. 
Bright, John, follows Liberal School, 

II. 
Buchez, foimder of first cooperative so- 
ciety, 432. 
Bucket-shop, 49. 
Building associations, 373, 375. 
Bullion, buying and selling, 186. 
Bullock, Introduction to the Study of 

Economics, 39, 47, 160. 
Bureau of Corporations, 322. 
Bureau of Immigration, 82. 
Business, investment in, 375. 
methods of doing, 307. 



Business, success in, 418. 
Butty system, 447. 

Call loans, 188. 

Canada, banking system, 228. 

Capital, a factor of production, 67 394. 

and labor, union between, 27. 

consumed in production, 97. 

defined, 94, 400. 

efi^ect of production on, 254. 

essential to production, 95. 

increase of, 97. 

kinds of, 97. 

mobility of, 412. 

productivity of, 409. 

requires labor, 95. 

results from saving, 96. 

use of, 409. 
Capitalism, era of, 69. 
Capitalist, as a party to distribution, 392. 

defined, 400. 

fimction of, 438. 

under Liberal School, 9. 
Capitalistic monopoly, 62. 
Casualty insurance in United States, 

352. 
Catholic doctrine of wages, 454. 
Catholic school, position of, 21, 385, 392, 

454- 
principles of, 24. 
representatives of, 20. 
theories on price regulation, 64. 

Catholic view of distribution, 385, 392. 

Cathrein, Victor, "Sociale Frage" in 
Kir chen Lexicon, 19, 24; Moralphilo- 
sophie, 330, 401, 402, 404, 405, 408. 

Cathrein-Gettelmann, Socialism, 14, 15, 
16, 19, 24, 387. 

Central bank, plans for, 209. 

Central Reserve City banks, 179, 180, 
203. 

Certificate of Association, 178. 

Certificate of Stock, 179. 

Certificates, United States gold and sil- 
ver, 109. 

Chartered free towns, 436. 

Checks, 161. 

Cherbuliez, political economy defined 
by, 5- 

Chevalier, 156. 

Child labor, restriction of, 27, 72, 446, 
461. 
wages afi'ected by, 448. 

Christian Socialists, 19. 

Church, activity of, in political economy, 
27. 
attitude towards interest, 403, 404. 
society evils remedied by, 26. 

Circulating capital, defined, 97. 



INDEX 



467 



Circulating notes, 175. 
Civilta Cattolica, 20, 25. 
Class legislation in protection, 274. 
Classical school, theories of price regula- 
tion, 63. 

wages-fund, theory of, 449. 
Classifications by railroads, 290, 294. 
Clayton Trust Bill, 321. 
Clearing house, 124, 161. 
Clearing House Association of New 

York, 162. 
Clearing House certificates, New York 

City, 208. 
Climate, a factor in production, 72. 
Cobden, Richard, 11. 
Coffin, ABC of Banking, 171. 
Coin money, 109. 
Coinage, defined, 117. 
Coins, buying and selling, i86. 

minor, 109, 114. 

standard, 109. 

subsidiary, 109, 114. 
Coinsurance clause, 362. 
Colbert, representative of mercantile sys- 
tem, 8. 
Collateral, 187. 
Comforts of life, 371. 
Commerce, domestic, 235. 

foreign, 233, 235. 
Commercial banks, 171, 185. 
Commercial bills of exchange, 163. 
Commercial crises, 208. 
Commercial industries, 70. ♦ 
Commercial speculation, 416. 
Commissioner of General Land Office, 

Report of, 326. 
Commissioner of Labor, Report of, 94, 

368. _ 
Commissioner of Navigation, Report of, 

240. 
Commodities clause in Hepburn Act, 

297.^ . 
Commodities present demand for money, 

124. 
Common price, 46. 
Common stock, 309. 
Communication, facilities of, 73. 
Communistic ownership of property, 

14- . . 
Communistic regime, 390. 
Commutative justice, 457. 
Competition and prices, 56. 

elimination by trusts, 315. 

laws of, 58 

under Liberal School, 9. 

vmder protection, 269, 270. 
Comptroller of Currency, 177. 

Report of, 208. 
Confederate notes, no. 



Congestion of money, 204. 
Congressional Commission on tariff 

251. 
Consolidated Stock Exchange of Nev» 

York, 48. 
Consols of 1930, 201, 347. 
Consular fees, 328. 
Consular service, 236. 
Consuls, duties of, 237. 
Consumers' League, 371. 
Consumers' Societies, 391 . 
Consumption, defined, 370. 

investing, 375. 

kinds of, 370. 

relation to production, 71, 371. 

saving, 374. 

spending, 372. 
Contract jobs, 447. 
Contraction of money, 144. 
Contractual system, 246. 
Convertible paper money, 109, no. 
Cooperation, advantages of, 432. 

as a remedy for evils of distributioHj 
391- 

difficulties of, 433. 

productive, 43'2. 
Cooperative societies, 373, 375. 
Copyright, 62. 
Copyright fees, 328. 
Corner in stock market, 50. 
Corporations, advantages of, 309. 

charter of, 309. 

defined, 308. 

industrial, 308. 

objections to, 310. 

overcapitalization in, 312. 
Corporation tax, 331, 335. 
Cost of living, 440. 
Cost of production, 57, 58, 417. 
Cotton Exchange of New York, 48. 
Court fees, 328. 
Court of Commerce, 298. 
Coxie's army of unemployed, 381 . 
Crafts arid guilds, 437. 
Credit, 160. 

instruments of, 124, 160. 
Credit associations, 391. 
Credit currency, 215. 
Credit department of banks, 187. 
Credit instruments, 124, 160. 
Credit insurance, 358. 
Credit money, 109. 
Creditor class, 154. 
Criminal class, 380, 381 . 
Crises, commercial, 146, 208. 
Crompton, mule invented by, 438, 
Cumulative preferred stock, 309. 
Curb market, 49. 
Currency, asset or credit, 215. 



468 



INDEX 



Currency, emergency, 217. 

inelastic, 205. 
Customhouse fees, 328. 
Customhouses, 236. 
Customs duties, 242, 330, 331. 
Customs Tariff, Senate Documents, 242. 

De Laveleye, E., Elements of Political 

Economy, loi, 344, 345. 
De Mun, Count, 18, 21. 
Dean, W. B., Practical Problems in 

Banking and Currency, 208, 216. 
Debt, floating, 346. 
funded, 347. 
public, 346. 
refunded, 347. 
Deductive method of political economy, 

6. 
Deferred payments, money as standard 

of, 117, 157. 
Demand and supply, defined, 371. 
effect in price, 53. 
of labor, 447. 
relation to production, 71. 
Denslow, Principles of Economic Phi- 
losophy, 109, 145, 146, 153. 
Denzinger, Enchiridion, 401, 402, 403, 

406, 407. 
Department of Commerce and Labor, 
322. 
Bulletin, 308. 
Report of, 82, 89, 235. 
Deposits, government guarantee of 
bank, 213. 
interest on, 186. 
in savings banks, 191. 
Depreciation of money, 148, 153. 
Devas, labor defined by, 77. 

Political Economy, 44, 56, 72. 
Difficulty of attainment, source of value, 

40. 
Dill, J. B., National Control of Corpora- 
tions, 319. 
Diminishing returns, law of, 73,. 75, 395, 

399- 
Dingley tariff, 251. 
Direct taxes, 330, 331. 
Directors, Board of, 309. 
Discount, rate of, 185. 
Discounting negotiable paper, 185. 
Discrimination by railroads, 291, 294. 
Distribution, Catholic view of, 385, 392. 

cooperation, 391. 

defined, 383. 

parties to, 392. 

socialist solution of, 387. 

of money, 127. 
Dividends, 309. 
Division of labor, 89. 



Domestic commerce, 235. 

Domestic exchange, 162. 

Domestic money, 109. 

Double-name paper, 185, 186. 

Double profit argument for protection, 

270. 
Dryden, J. F., Life Insurance and Other 

Subjects, 364, 367. 
Dummy directors, 310. 
Duties, customs, ad valorem, 242. 

export, 242, 331, 336. 

import, 242, 331, 336. 

specific, 242. 

to discourage imports, 8. 

Earnings, extra, 441. 
Eclectic School, 12. 
Economic consumption, 370. 
Economic utility, 38. 
Economic value, 38. 
Economics, study of, 32. 
Economy in trusts, 316. 
Efficiency of labor, 79. 
Elkins Act, 296. 

Ely, R. T., Outlines of Economics, 12, 42, 
66, 183, 243. 

Problems of To-day, 256, 265. 

Trade-Unions, 447. 
Embargo Act, 249. 
Emergency currency, 217. 
Emergency Currency Law, 217. 
Emergency notes, 229. 
Employen^ as a party to distribution, 

392. 
Employers' liability act, 72. 

extension of, 461. 
Employers' liability insurance, 359, 364. 
Employment, regularity of, 441. 
Encyclical Rcrum Novarum, 7, 21, 318, 

387. 
Encyclopedia Americana, 289, 320. 
Encyclopedists, 10. 
Endowment insurance, 359. 
Endowment policy, 368. 
Engel, explanation of poverty, 378. 
English banking system, 227. 
Entrepreneurs, classes of, 420. 

distinguished from capitalists, 415. 

profits received by, 414. 
Equal sharing, 387. 
Equality of men, 385. 
Ethics, relation to political economy, 4. 
Evangelical Socialists, 19. 
Examination fees, 328. 
Exchange, advantages of, 100. 

advantages derived from middlemen. 
102. 

bills of, 160, 238. 

buying and selling, 186. 



INDEX 



469 



Exchange, domestic, 162. 

explanation of, 100. 

foreign, 162. 

mechanism of, loi. 

money as medium of, 115. 

rate of, 166. 

transportation as a factor, 104. 

value in, 38, 41. 
Exchangeability of objects, 35. 
Exchanges, list of, 47. 
Export duties, 242, 331, 336. 
Export trade, defined, 233. 

under mercantile system, 8. 
Exportation, advantages of, 234. 
Exports and imports, correlation be- 
tween, 241. 
Extensive production, 74. 
Extrinsic titles to interest, 402, 406. 

Factory Inspection of New York State 

Department of Labor, 93. 
Factory laws, 438. 
Factory system, 438. 
Family wage, 457. 
Farmer and protection, 269. 
Federal advisory council, 176. 
Federal reserve act, 171, 172, 224. 
Federal reserve agent, 173, 175, 176. 
Federal reserve bank, board of directors 
of, 173- 

branch banks of, 173. 

certificate of organization, 173. 

depositaries of government fvmds, 175, 
186. 

earnings of, 174. 

exempt from taxes, 174. 

functions of, 184. 

member banks of, 172, 173, 185. 

organization of, 172. 

reserves of, 176. 
Federal reserve board, 172, 174, 219. 

powers of, 174, 175. 
Federal reserve cities, 172, 219. 
Federal reserve districts, 172, 219. 
Federal reserve notes, 175, 176. 
Federal reserve system, 219. 
Federal Trade Commission, 323. 
Federated bank, 210. 
Fee system, evils of, 329. 
Fees, defined, 436. 

as sources of revenue, 327. 
Fertility of land, a factor in production, 73. 
Fetter, Principles of Economics, 283, 370. 
Feudal system, 384, 436. 
Fiat money, no. 

Fidelity and surety insurance, 358. 
Financial crises, 146. 
Fines as sources of revenue, 327. 
Fire and marine insurance companies, 351. 



Fire insurance, described, 358, 361. 

in seventeenth century, 350. 
Fiske, The Modern Bank, 183. 
Fixed capital, defined, 97. 
Floating debt, 346. 
Fluctuation of market prices, 47. 
Force Act, 249. 
Foreign bills of exchange, 163, 
Foreign commerce, 233, 235. 
Foreign exchange, 162. 
Foreign investments, 239. 
Foreign money, 109. 
Foreign payments, 237. 
Foreign trade, 261. 
Forgan, J. B., Practical Problems in 

Banking and Currency, 207. 
Fowler bill, 216. 
France, Bank of, 228. 
Franchise, corporation, 309, 311. 
Frankel and Dawson, Workingmen^s In- 
surance in Europe, 349. 
Free banking law, 199. 
Free coinage, 117. 
Free list, tariff, 243. 

Free trade, adopted by Southern Con- 
federac}^ 250. 

arguments for, 272, 274. 

Physiocrats' theory of, 11. 

supported by Liberal School, 112. 
French School, 12. 
Funded debt, 347. 

George, Henry, Progress and Poverty, 

17, 18. 
German tariff, 246. 
Germany, Imperial Bank, 212, 216, 

228. 
Gide, Principles of Political Economy, 

3, 34, 92, 107, no, 113, 120, 155, 260, 

267, 370, 373, 387, 409, 416, 429, 

434, 448, 453- 
Go-easy system, 447. 
Gold, and silver, 134, 135. 

bullion, 113. 

discovered in California, 156. 

effect on prices, 440. 

free coinage of, 117. 

money, 107. 

Physiocrats' theory of, 11. 

world's production of, 151. 
Gold certificates, 113. 
"Gold points," 169. 
Governing committee, 48. 
Government, Catholic view of, 25. 
Government aid for unemployed, 381. 
Government banks in foreign countries, 

194. 
Government bonds, 347, 377. 
Government debt, 346, 347 



470 



INDEX 



Government guarantee of bank deposits, 
213. 

Government loans, 346, 347. 

Government monopolies, 11, 61, 62, 
326, 327. 

Government ownership of public utili- 
ties, 326, 327. 

Government ownership of railroads, 
arguments for, 2gg. 
in foreign countries, 303. 
objections to, 304. 

Government revenue, sources of, 325. 

Grants, to railroads, 283. 

Greenbacks, history of, no, 114. 

Gresham's law, effect of, in 1793, 135. 
limitation of, 133. 
operation of, 131, 132. 
statement of, 131. 

Gross product, 68. 

Gross profits, defined, 416. 

Grosscup, Hon. P. S., The Government's 
Relation to Corporate Construction 
and Management, 322. 

Guarantee fund, in joint-stock com- 
panies, 357. 

Guarantee of bank deposits, government, 
_ 213. 

Guilds and crafts, 437. 

Guyot, Yves, defiinition of political econ- 
omy, s. 

Hadley, A. T., Railroad Transportation, 

304- 

Hamilton, Alexander, advocates bi- 
metallism, 135. 

Handy, Banking Systems of the World, 
196, igg, 204. 

Hargreaves, spinning jenny invented by, 
438. 

Harlan, Justice, in Tobacco Trust case, 
321. 

Hazeltine, M. W., The Banking and Cur- 
rency Problem in the United States, 
204. 

Health insurance, 358. 

" Heavy " money, 118. , 

Hefele, Conciles de VEglise, 401. 

Hepburn Act, 297. 

Hepburn, A. B., Contest for Sound 
Money, 132, 133, 145, 186, 199, 200, 
228. 
in Bolles, Practical Banking, 192. 
in Practical Problems in Banking and 
Currency, 210. 

Hierarchy of labor, 81. 

Historical political economy, 32. 

Historical School, principles of, 29. 

Historical sketch, of banking, 194, 227. 
of bimetallism in United States, 135. 



Historical sketch, of Graham's law, 131. 
of insurance, 349. 
of interest, 401. 

of protection and free trade, 248. 
of the precious metals, 149. 
of wages, 436. 
Hoarding of money, 129. 
Hobson, J. K., .The Evolution of Modern 

Capitalism, 311, 316, 442. 
Holding companies, 315. 
Holmes, on distribution of wealth in 

United States, 388. 
Holzapfel, P. H., Die Anfdnge der 

Monies Pietatis, 194, 406. 
Home market argument for protection, 

269. 
Hours of labor, 27, 442. 
Human society, 2. 
Huppert, Versicherungswesen, 349, 350. 

Immaterial goods as wealth, 36. 

Immigration, effect on labor, 446. 

Immigration laws, 380. 

Imperial Bank of Germany, 194, 212, 228. 

Import duties, 242, 331, 336. 

Import trade, defined, 233. 
under mercantile system, 8. 

Importation, advantages of, 233. 

Imports and exports, correlation be- 
tween, 241. 

Incidence of taxes, 337, 338. 

Income tax, 331, S33- 

Inconvertible paper money, no. 

Incorporation fees, 32. 

Increasing returns, law of, 74. 

Independent treasury system, 197, 204. 

Index numbers, system of, 51. 

Indiana State Fee and Salary Com- 
mission, 328, 329. 

Indianapolis Monetary Commission, 216. 

Indirect taxes, 330, 335. 

Individual, freedom of, in Liberal School, 
10. 

Individual establishment defined, 308. 

Individual production, 67. 

Individualism, 13, 22. 

Indorsed paper, 186. 

Inductive method of political economy, 6. 

Industrial corporations, 308. 

Industrial insurance, 363, 375, 462. 

Industrial Revolution, 69. 

Industrial School of Political Economy, 
II. 

Industrial schools, 381. 

Industries, infant, 246, 272. 
productive, 69. 

Inelastic currency, 205. 

Infant industries, 246, 268, 272. 

Inflation of money, 143. 



INDEX 



471 



Inheritance tax, 331, 334. 

Innocent XI, Pope, loans condemned by, 

403- 
Inspection fees, 328. 
Insurance, casualty, 352. 

defined, 349. 

economic advantages of, 352. 

extent of business, 350. 

fire, 350, 361. 

history of, 349. 

in cost of production, 68. 

industrial, 363, 375, 462. 

kinds of, 358. 

kinds of companies, 357. 

life, 350, 358, 359. 

nature of, 352. 

of laborer, 27. 

theory of, 353- . 
Insurance and annuity policy, 368. 
Insurance Yearbook, 350, 351, 352, 360, 

365. 
Intensive production, 74. 
Interest, attitude of Church toward, 401, 
404. 

authorized by civil authority, 404. 

defined, 394, 400. 

factors determining rates, 412. 

historical sketch of, 401. 

in cost of production, 68. 

objections to, 408. 

rate of, 411. 

socialist theory of, 410. 

theories of, 409. 
Internal revenue taxes, 331, 335. 
International Encyclopedia, 350, 447. 
International trade, advantage of, 233. 

balance of trade and balance of ac- 
counts, 238, 239. 

causes of, 232. 

consulir service, 236. 

contractual system, 246. 

customs duties, 242. 

defined, 232. 

domestic commerce, 235. 

effects of, 233. 

extent of, 234. 

free trade, 272. 

foreign payments, 237. 

function of, 267. 

imports and exports, 241 . 

protection, 248. 

protectionist policy of United States, 

243- 
tariff, 242. 
Interstate commerce, control of, 72, 

296, 322. 
Interstate Commerce Commission, his- 
tory of, 296. 
power of, 297, 323. 



Interstate trading, 319. 
Inventions, mechanical, 437. 
Inventiveness, encouraged by protection, 
270. 

of manager, 415. 
Investing, conditions for, 376. 

defined, 375. 

ways of, 375. 
Investments, foreign, 239. 

of savings banks, 192. 
Ireton, R. E., Currency Reform: A Cen- 
tral Bank, 210. 
Iron law of wages, 24, 451. 

objections to, 453. 
Irredeemable paper money, no. 
Isolation of banks, 202. 

Jevons, Stanley, definition of money, 107. 

on value of gold, 157, 158. 
Johnson, J. F., in Annals of the American 

Academy of Political and Social 

Science, 229. 
Joint-stock companies, described, 308, 

357- . 
for fire insurance, 361. 
organization of, 428. 
Journal of Political Economy, 297, 321, 

322, 349, 366. 
Journeymen in guild system, 437. 
Just price, 45. 
Just wage, amount of, 458. 
how to establish, 460. 

Kay, shuttle invented by, 437. 
Ketteler, Bishop von. Die Arbeiterfrage 

und das Christenthum, 21. 
Kirchen-Lexicon, 19, 24, 405. 
Koch, A., Zins und Wucher, 405. 
Krupp foundries, social work at, 462. 

Labor, a cause of value, 40. 
a factor of production, 67. 
Agrarian socialist view of, 18. 
and capital, 27. 
bureaus of, 461. 
capacity for, 441. 
Catholic view of, 26. 
child, 27, 72, 446, 448, 461. 
defined, 77. 
demand for, 447. 
division of, 80. 

effect of protection on, 254, 270. 
efficiency of, 79. 
hierarchy of, 81. 
hours of, 27, 442. 
Liberal School view of, 9, 11. 
objects procured by, 35. 
of women and children, 26, 27, 446, 448, 
461. 



472 



INDEX 



Labor, prohibition of, on Sunday, 27. 

relation of machinery to, 92. 

required by capital, 95. 

requisites, 77. 

skilled, 445. 

socialist theory of, 16. 

supply of, 446. 

unskilled, 445. 
Labor coupons, 16. 
Labor laws, 438. 
Labor time, 391. 
Labor imions, effect on supply of labor, 

447- 
eflfect on wages, 448. 

encouragement of, 461. 

favored by Catholic School, 26. 

legality of, 438. 
Laborer, as a party to distribution, 392. 
Laboring class, 22, 23, 79. 
Lading, bill of, 164. 

Laissez faire doctrine, 10, 12, 25, 30, 225. 
Land, a factor in production, 72, 394, 

Agrarian socialist theory of, 17. 

rent, see Rent. 

under Liberal School, 9. 
Land office fees, 328. 
Landlord, as a party to distribution, 392. 
Lapse of policy, 360, 366. 
Laughlin, Political Economy, 74, 393. 
Lawful money, 109. 
Legal monopoly, 62. 
Legal price, 45. 
Legal rate of interest, 411. 
Legal ratio, 135. 
Legal regulation of price, 63. 
Legal security, 376. 
Legal tender notes, 114. 
Lehmkuhl, Theologia M oralis I, 403, 407. 
Leo XIII, Pope, Encyclical Rerum No- 

varum, 21, 71, 318, 387, 455. 
Leroy-Beaulieu, on relation of political 
economy to ethics, 6. 

The United States in the Twentieth 
Century, 308, 314. 

Traite d^ economic politique, 6. 
Levasseur, E., Histoire des classes ou- 
vrieres et de Vindustrie en France 
avant 178 g, 349. 
Level annual premium, 359. 
Liability limited, 308. 

unlimited, 308. 
Liberal School, branches of, 10. 

deny existence of social question, 383. 

law of supply and demand, 53. 

on laws of production, 71. 

rejection of, 23. 

tenets of, 8. 

theories of price of, 46. 
Liberatore, Political Economy, 25. 



License fees, 328. 

Life insurance, defined, 358, 

development of, 350. 

kinds of, 359. 

statistics, 351. 
Life poHcy, 359. 
"Light" money, 118. 
Limitation of quantity, a, source of value, 

40- 
Limited liability, 308. 
Limited partnership, 308. 
Limited payment policy, 359. 
Living in common, 372. 
Loading in insurance, 360. 
Loan and trust companies, 171, 182, 190. 
Loans, call, 188. 

in bottomry, 349. 

investment in, 375. 

methods of making, 186. 

public, 346. 

time, 187. 

under Liberal School, 9. 
Local association, 211. 
Local discrimination of railroads, 292. 
Lockouts, cause of unemployment, 441. 
London Stock Exchange, 47. 
Long-and-short-haul principle, 296. 
Long-term contracts, remedy in, 147. 
Low wages, cause of, 459. 
Luxuries of life, 371, 373. 

Machine work, influence on labor, 22. 
Machinery, accidents from, 93. 

advantages and disadvantages of, 92. 

guarding of, 27. 

in cost of production, 68. 

increasing application of, 14. 
Mail service, government ownership of, 

327. 
Malthus, T. R., An Essay on the Principle 
of Population, 82, 83, 84, 85. 

doctrine of, 82, 446. 

doctrine rejected, 86. 
Malthusians, 86. 
Manager, profits received by, 414. 

see also Entrepreneur. 
Manchester School, 12. 
Mann-Elkins law, 297, 298. 
Manufacturing industries, defined, 70. 

in sixteenth century, 437. 
Margin, of cultivation, 397, 399. 

trading on, 49. 
Marginal theory of value, 12, 42. 
Marginal utility, law of diminution of, 

43- 
Marginal value^, 42. 

Marine and fire insurance companies, 351 . 
Marine insurance, 358. 
Maritime Exchange of New York, 48. 



INDEX 



473 



Market price, 47. 

Market ratio, 135. 

Market value, 135. 

Marriage, relation to prosperity, 3. 

sacredness of, 24. 
Marx, Karl, Capital, 426. 

Criticism of Political Economy, 17. 

theories of value of, 40, 41. 

theory of interest of, 411. 
Massachusetts Life Insurance Com- 
pany, 350. 
Masters, in guild system, 437. 
Mathematical School of political econ- 
omy, 13. 
Maximum rate of interest, 411. 
Maximum rate of tariff, 247, 252. 
May, R. E., on per capita wealth, 389. 
McKinley tariff, 251. 
McMaster, History of the People of the 

United States, 197. 
McPherson, Logan G., Transportation 

in Europe, 303 . 
Mechanical inventions, 437. 
Medium of exchange, money as, 115. 
Member banks, 172, 173, 183, 185. 

subscription of, 173. 
Mercantile system, 7. 
Metal Exchange of New York, 48. 
Meyer, Th., Institutiones Juris Naturalis, 

ASS- 
Middlemen, function of, 102. 

number of, effect on demand for 
money, 123. 
Milan Decree, 248. 

Military argument for protection, 270. 
Mill, J. Stuart, definition of political 
economy, 5. 
on Protection, 256. 
Political Economy, 39, 121, 125, 334, 

341, 449- 
Mills Bill, 251. _ 
Mineral industries, 70. 
Minerals, factors in production, 73. 
Minimum rate, of tariff, 247, 252. 

of wages, 448. 
Minimum wage, 27, 460. 
Minor coins, 114. 
Mints, 117. 
Mixed taxes, 331. 
Mobility, of capital, 412. 

of labor, 448. 

of taxes, 338. 
Moderate Liberal School, 12. 
Monetary crises, 146, 208. 
Money, a measure of value, 116. 

a medium of exchange, 115. 

a multiple tender, 157. 

as standard of deferred payments, 117, 
157- 



Money, as wealth, 36. 
at discount, 109. 
at par, 109. 
at premium, 109. 
bimetallism and monometallism, 134, 

140, 141. 
coinage of, 117. 
congestion of, 204. 
contraction of, 144. 
defined, 107. 
demand for, 122. 
depreciation of, 148, 153. 
development of, 105. 
disappearance of, 1 29. 
distribution of, 127. 
financial crises, 146. 
Gresham's law of, 128. 
growth of population affects demand 

for, 123. 
historical sketch of precious metals, 

149. 
increase of, 156. 
inflation of, 143. 
kinds of, 109, 113. 
law of prices, 125, 
lawful, 109. 
laws affecting, 120. 
measure of value, 45. 
metal as, 106. 
of account, 113. 

properties of gold and silver, 107. 
purchasing power of, 51, 440. 
quantity theory of, 121. 
relation between commodities and, 

119, 124. 
remedy for fluctuation in long-term 

contracts, 147. 
stringency of, 124. 
supply of, 124. 
variation in values affects productive 

industries, 145. 
variations in, 120. 
world's production of gold and silver, 

151- 
Monometallism, arguments for, 141. 

defined, 134. 
Monopolies, government, 326, 327. 

kinds of, 61. 

law against, 320. 

of railroads, 288. 

of trusts, 315. 

profits of, 418. 
Monopoly price, 61, 63. 
Montague, G. H., Trusts of To-day, 315, 

318, 319, 320. 
Monies Pietatis, 406. 
Montgomery, D. H., The Student's 

American History, 197. 
Moral security, 376. 



474 



INDEX 



Morawetz, V., The Banking and Cur- 
rency Problem in the United States, 
217. 

Morrill tariflF act, 250. 

Mortality tables, 359. 

Mortgage insurance, 359. 

"Most favored nation" clause, 247. 

Mule invented, 438. 

Multiple tender, 157. 

Mutual companies, described, 357. 
for fire ihsurance, 361. 

Mutual insurance for fire, 363. 

Mutual Life Insurance Company, 350. 

National Bank Act, 177. 
National bank notes, 114. 
National bank system, 176, 200. 

defects of, 202, 219. 

foreign branches, 190. 

history of, 200. 

origin of, 200, 202. 

remedies proposed for evils of, 209, 
220. 
National Currency Association, 218. 
National Monetary Commission, 218. 

Documents, 208, 212, 222, 234, 241. 
National production, 67. 
National Reserve Association of Amer- 
ica, 210. 
Natural equality, 386. 
Natural forces, 73. 
Natural monopoly, 62. 
Natural premium, 359, 
Natural price, 46. 
Natural resources developed through 

protection policy, 271. 
Nature, a factor in production, 67, 72. 
Necessaries of life, 371. 
Negotiable paper, discounting, 185. 
Net premium, 359. 
Net product, 68. 
Net profits, defined, 416. 
Nettleton, Gen. A. B., Shall Bank De- 
posits Be Gtiaranteed ? 214. 
New York Clearing House, 162. 
New York Life and Trust Company, 350. 
New York State Department of Labor, 

93, 94- 
New York Stock Exchange, 47, 48. 
Newcomb, Facts about Railroads, 283. 
No-profit stage of industrial society, 419. 
No-profits grade of business managers, 

421. 
No-rent land, 397, 399. 
Nominal wages, 439. 
Non-cumulative preferred stock, 309. 
Non-intercourse Act, 249. 
Non-productive consumption, 370. 
Normal price, 47. 



North American Review, 204, 217. 
Note issue, remedies affecting, 215. 
Notes, bank, 160. 

circulating, 175. 

promissory, 160. 

Occupation tax, 332, 333. 

Old-age pension policies, 368. 

Ontario Commission on the Election and 
Mode of Payment of Certain Prom- 
inent Officials, 329. 

Order in Council, 248. 

Outdoor relief for poverty, 380. 

Overcapitalization, in corporations, 3{r2. 
of railroads, 286. 

Overproduction, 260. 

Owen, Robert, objections to profits, 426. 

Pain, a factor in productive labor, 78. 

Panama Canal Loan, 347. 

Panic, cause of, 213. 

Paper money, defects of, no. 

effect on national wealth, in. 

signs of over-issue of, 112. 
Par of exchange, 166. 
Parents, right to educate child, 24. 
Paris Bourse, 47. 
Partnership, defined, 308. 
Patent, for exclusive production of arti- 
cle, 62. 
Patent fees, 328. 
Patten, S. N., The Economic Basis of 

Protection, 271. 
Payments, foreign, 130, 237. 

form of, 441. 
Payne tariff, 251. 

Peel, Robert, advocates free trade, 11. 
Pension funds, 311. 
Per capita money circulation, 115. 
Per capita wealth, 389. 
Permanent income, 333. 
Personal discrimination by railroads, 

291. 
Personal insurance, 358, 
Personal tax, 331. 
Personal wage, 457. 
Pesch, H., Lehrbuch der Nationaloko- 

nomie, 18. 
Physiocrats, principles of, 10. 

theory of taxation, 338. 
Piece wages, 439, 447. 
Pius VIII, Pope, on interest, 404. 
Plant industries, 69. 
Policy insurance, defined, 357. 

lapse of, 360, 366. 

life, 359. 

limited payment, 359. 

non-participating, 359. 

surrender of, 360. 



INDEX 



475 



Political economy, a science, 2, 3. 

defined, i. 

divisions of, 32. 

laws of, 2. 

method of, 6. 

relation to ethics, 4, 5. 

relation to political science, 6. 

schools of, 7, 8, II, 13, 20, 29. 
PoUtical science, relation to political 

economy, 6. 
Political security, 376. 
Poll tax, 330, 331. 
Pooling, in German railroads, 302. 

prevention of, 296. 
Pools of trusts, 315. 
Poor law system, 379. 
Poor's Manual of Railroads, 281, 289. 
Population, growth of, 123, 446. 

law of, 82. 
Postal Savings Bank Act, 223. 
Postal savings banks, deposits, where 
placed, 224. 

diffusion of system, 222, 462. 

function of, 222, 375. 
Post-office life insurance, 364. 
Post-office system, government owner- 
ship of, 299. 
Poverty, causes of, 378. 

explanation of, 377. 

relief of unemployed, 380. 

remedies for, 379. 
Practical political economy, 32. 
Practical Problems in Banking and Cur- 
rency, 187, 189, 190, 205, 206, 207, 
208, 209, 210, 216, 217. 
Pratt, G. S., The Work of Wall Street, 

51- 
Precious metals, historical sketch, 149. 
Preferred stock, 309. 
Premium, insurance, 354, 357, 359, 360, 

362. _ 
Presbyterian Annuity and Life Insur- 
ance Company, 350. 
Preventive measures, in fire insurance, 

362. 
Price, according to Classical School, 63. 

according to Liberal School, 53. 

according to scholastic doctrine, 45. 

and competition, 56. 

and money, 119. 

cause of rise and fall of, 440. 

common, 46. 

definition and explanation of, 44. 

fixed by law, 63. 

government regulation of, 63. 

just, 45. 

laws of, 120, 125. 

legal, 45. 

market, 47. 



Price, monopoly, 61. 

natural, 46. 

normal, 47. 

of manufactured articles, 60, 

production influences, 440, 

raised by protection, 258. 

variations of, 51. 
Private artificial monopoly, 62. 
Private banks, 171, 182, 185. 
Private consumption, 370. 
Private individual relief for poverty, 

379-, 
Private institutional reUef for poverty, 

379- 
Private monopoly, 61, 62. 
Private natural monopoly, 62. 
Private production, 67. 
Private property, socialist theory of, 

IS- 

state socialist theory of, 18. 

under Catholic School, 24. 
Private wealth, 36. 
Produce Exchange of New York, 48, 
Product, defined, 67. 
Production, capital consumed in, 97. 

capital essential to, 95. 

consumption the aim of, 370, 

cost of, 68. 

defined, 66. 

end of, 70. 

extensive, 74. 

factors of, 67, 72. 

hindrances to, 88. 

influences prices, 440. 

intensive, 74. 

kinds of, 67, 68. 

land a factor in, 72, 394. 

law of diminishing returns, 73. 

law of increasing returns, 74. 

laws of, 71. 

Liberal School on, 71. 

nature a factor in, 72. 

relation to consumption, 371. 

socialist theory of, 16. 

transportation aids, 276. 
Productive associations, 391. 
Productive consumption, 370. 
Productive cooperation, 432. 
Productive industries, 69, 145. 
Productive theory of wages, 453, 454. 
Productivity of capital, 409. 
Profit sharing, 311, 428. 
Profits, 414. 

a monopolistic income, 416. 

defined, 68, 415, 416. 

investment for, 376. 

manager receives, 414. 

means proposed to do away with, 
427. 



476 



INDEX 



Profits, objections to, 426. 

principle regulating, 418. 

relation to wages, 422. 
Progressive tax, S33- 
Promissory notes, instruments of credit, 

160. 
Promoter, function of, 314, 438. 
Property, individual, 15. 

private, 15, 18, 24. 

under Historical School, 30. 
Property insurance, 358. 
Property taxes, 331. 

Protection, arguments for, 266 ; against, 
272. 

balance of trade argument for, 269, 
273- 

double profit argument for, 270. 

effects and principles of, 253, 254. 

foreign trade reduced by, 261. 

general argument for, 266. 

historical sketch of, 248. 

home market argument for, 269, 273. 

infant industry argument for, 268, 
272. 

international animosities caused by, 
262. 

limitation of, 260. 

methods to replace, 246. 

military argument for, 270. 

prices raised by, 258. 

specific arguments for, 268. 

taxation argument for, 269, 273. 

temporary character of, 256. 

variegated production argument for, 
269, 272. 

wages not raised by, 263. 
Protectionist policy of United States, 

243. 
Protective tariff, 243. 

see Protection. 
Prudential Assurance Company of Lon- 
don, 364. 
Prudential Friendly Society, 364. 
Prudential Insurance Company of Amer- 
ica, 364. 
Psychological School, 13. 
Public businesses, 325. 
Public consumption, 370. 
PubUc debts, 346. 
PubHc domains, 325. 
Public loans, 346. 
Public monopolies, 61, 62. 
Public opinion, effect on wages, 462. 
Public production, 67. 
Public relief for poverty, 379, 381. 
Pugsley, C. A., in Practical Problems in 

Banking and Currency, 217. 
Purchasing power of money, 51, 440. 
Pure food laws, 72. 



Quantity theory of money, 121. 
Quesnay, leader of Physiocrats, 10. 

Railroad bonds, as investments, 377, 
Railroads, a monopoly, 288. 

business of, 281. 

charges of, 287. 

classification of commodities, 290. 

conditions affecting building of, 279. 

control of, in foreign coxmtries, 300- 
303. 

cost of, 279. 

evils of, 294. 

government grants to, 283. 

government ownership of, 299, 303, 

304- 
groups of, 281. 
growth of, 278. 
in foreign countries, 300, 303. 
local discrimination of, 292. 
objections to government ownership, 

304- 

overcapitalization, 286. 

personal discrimination of, 291, 294. 

physical valuation of, 287. 

power of managers, 285. 

private and public, 282. 

rebating by, 294. 

remedies for evils of, 295. 
Railway Statistics of United States, 278, 

279. 
Rate of exchange, defined, 166. 

factors determining, 167. 

favorable and unfavorable, 168. 

variation of, 169. 
Rate of interest, legal, 411. 

maximum, 411. 
Ratio, between gold and silver, 134. 

legal, 135.' 

market, 135. 
Raw material, in cost of production, 68. 
Real wages, 439. 
Rebating, by railroads, 294. 
Redeemable paper money, 109. 
Refunded debt, 347. 
Reichsbank of Germany, 194, 212, 228. 
Reinsurance, defined, 357. 
Relative poverty, 377. 
Relative rent, 393. 
Relief for poverty, 379. 
Relief of the unemployed, 380. 
Rent, Agrarian socialist view of, 18. 

defined, 393, 394-. 

in cost of production, 68. 

law of, 397. 

Ricardo's law of, 395, 398, 399, 400. 
Repairs in cost of production, 68. 
Report of Commissioner of General Land 
Office, 326. 



INDEX 



477 



Report of Commissioner of Labor, 368. 
Report of Commissioner of Navigation, 

240. 
Report of Comptroller of the Currency, 

162, 188, 208. 
Report of Department of Commerce and 

Labor, 82, 89, 235. 
Report of Factory Inspection of New York 

State Dept. of Labor, 93. 
Report of Secretary of Treasury, 172, 206, 

347. 
Rerum Novarum, 21, 71, 318, 387, 455. 
Reserve association, 210. 
Reserve city banks, 179, 203. 
Reserve fund of insurance companies, 

360. 
Reserves, federal reserve banks, 176. 

national banks, 179, 203. 
Restraint of trade, 320. 
Retail markets, 47. 
Revenue tarifif, 243. 
Ricardo, law of rent, 395, 398, 399, 400. 

on wages, 449. 

theories of value of, 40. 
"Right" money, 118. 
Roscher, Wm., Grundriss zu Vorlesungen 
iiber die Staatswirtschaft nach ge- 
schichtlicher Methode, 29. 
Rossi, definition of political economy, 5. 
Rousseau and the Liberal School, 10. 
Ryan, J., A Living Wage, 458, 460. 

Safety fund system, 199. 

St. Thomas, Summa, 401. 

Salaries, defined, 436. 

Sanitarj' conditions, enforcement of, 27. 

Saving, a source of capital, 96. 

conditions for, 374. 

defined, 374. 

institutions for, 375. 
Savings bank insurance, 368. 
Savings banks, described, 183. 

functions of, 191. 

increase of, 462. 

postal, 222, 375, 462. 
Scarcity, a cause of value, 40. 
Scholastic doctrine of price, 45. 
Schools of Political Economy, 8. 

Catholic, 20. 

Historical, 29. 

Industrial, 11. 

Liberal, 8. 

Mercantile system, 7. 

Socialist, 13. 
Scotland, bank system in, 230. 
Security for loans, 187, 188. 
Seigniorage, 117. 

Seligman, Principles of Economics, 354, 
379- 



Serfs, 384, 436. 

Shareholders of corporations, 308. 

Shares of stock, 308. 

Sharing, according to labor, 391. 

according to merits, or capacities, 390. 

according to wants, 390. 

equal, 387. 
Shaw, Secretary, plan for emergency 

currency, 217. 
Shearman, Thos. G., on distribution of 

wealth, in United States, 388. 
Sherman act, 138. 
Sherman Antitrust Law, 320. 
Shifting of a tax, 337, 338. 
Shuttle invented, 437. 
Silent partners, 308. 
Silver, coins, 113, 114. 

free coinage of, 117. 

market value of, 135. 

properties as money, 107. 

ratio to gold, 134. 

world's production of, 151, 156. 
Silver certificates, 114. 
Silver dollars, 113. 
Single-name paper, 186. 
Single tax, 17. 
Skilled labor, 445. 
Slaves, in Rome, 384. 

labor of, 436. 
Small ey, H. S., Trust Regulation and the 

Courts, 321. 
Smith, Adam, distribution not treated 
by, 384- 

labor theory of, 40. 

theories of value of, 40. 

Wealth of Nations, 248, 345. 
Social Democracy, 14, 15. 
Social evils, cause of, 21. 
Socialism, 13. 

branches of, 17. 

defenders of, 16. 

principles of, 13, 15. 

purpose of modem, 14. 

rejection of, 23. 

theory of value of, 40. 

see also Socialists. 
Socialist School, 13. 
Socialists, in United States, 14. 

object to profits, 426. 

on profit sharing, 430. 

solution of distribution, 387. 

theory of interest, 410. 

wages theory of, 451. 

see also Socialism. 
Social question, 21, 23, 383. 
Special commodities rates, of railroads, 

291. 
Specific duty, 242. 
Speculation in stocks, 49. 



478 



INDEX 



Speculative science, 3. 
Spending, defined, 372. 

means of reducing, 372. 
Spinning jenny invented, 438. 
Spoils system, 237. 
Siaats Lexicon, 315, 349, 350. 
Stamp taxes, 331, 337. 
Standard coin, 109. 
Standard of living, 443, 452. 
Standard Oil Company, 50. 
State, activity of, 26. 

direct intervention to fix wages, 460. 

government of, under Socialism, 15. 

indirect action to fix wages, 461. 
State antitrust laws, 319, 320. 
State banks, described, 171. 

established, 198. 

functions of, 185. 

organization of, 182. 
State Commission of Railroads, 296. 
State monopoly, 61, 62. 
State ownership of capital, 15. 
State savings banks, 375. 
State Socialists, 18. 

Statistical Abstract, United States, 81, 
120, 152, 234, 235, 238, 240, 281, 
290, 339. 
Statistics of Mathematical School, 13. 
Steam engine, use of, 438. 
Stevenson, R. T., The History of North 

America, 196, 197. 
Stickney, A. B., in Practical Problems in 

Banking and Currency, i8g. 
Stimson, F. J., The American Constitution, 

322. 
Stock companies, described, 428. 
Stock Exchange, 47. 
Stockholders of corporations, 308. 
Stock insurance, 358. 
Stocks, as investment, 377. 

common, 309. 

preferred, 309. 

speculation in, 49. 

watering, 312. 
Storage, in cost of production, 68. 
Straight life insurance, 359. 
Straight life poHcy, 368. 
Strikes, cause of unemployed, 441. 
Stringency of money, 1 24. 
Subscription of member banks, 173. 
Subsidiary coins, 114. 
Sufficient wage, 457. 
SuiJolk Bank system, 199. 
Superintendence, a factor in profits, 

415- 
Supply, and demand, 9, 53, 371, 445, 447. 
control of, 62. 
of labor, 446. 
of money, 12 1„ 



Supreme Court (U. S.) decision on cor- 
poration tax, 335. 

decision on interstate commerce, 320. 

decision on United States Bank, 210. 
Surplus and Undivided Profits fund, 179. 
Surplus of insurance companies, 360. 
Surrender of policy, 360. 
Suspension of obligation, 459. 

Tariff, defined, 242. 

Dingley, 251. 

free list, 243. 

German, 246. 

McKinley, 251. 

Morrill, 250. 

of 1909, 245. 

Payne, 251. 

protective, and revenue, 243. 

Underwood, 252. 

Walker, 250. 

war, 250. 

Wilson- Gorman, 251. 
Tariff Commission, 246. 
Taxation, principles of, 340. 

right of state to, 330. 

see Taxes. 
Taxation argument for protection, 269, 

273- 
Taxes, as sources of revenue, 68, 329. 

certainty of, 342. 

incidence and shifting of, 337. 

in cost of production, 68, 

kinds of, 330. 

reduction of, 461. 

under Physiocrats, 11. 
Taylor, N. M., Elements of Taxation, 

326, 327, 334. 
Temporary income, 333. 
Term insurance, 359. 
Theoretical political economy, 32. 
Time, a factor in productive labor, 78. 

in relation to interest, 410. 
Time loan, 187. 
Time wages, 439. 
Time work forbidden, 447. 
Tobacco as money, 106, 108. 
Toil, a factor of productive labor, 78. 
Token money, 109. 
Trade, balance of, 8, 238, 268, 273. 

export, 233. 

foreign, 261. 

free, 11, 12, 250, 272, 274. 

import, 233. 

international, 232, 267 ; see Interna- 
tional Trade. 

state of, effect on demand for money, 
123. 
Traders, function of, 102. 
Tradesmen, classes of, 437. 



INDEX 



479 



Trade-unions. See Labor Unions. 
Trading on margin, 49. 
Transit insurance, 358. 
Transportation, a factor of exchange, 
104. 

an aid to production, 276. 

cost of, 239. 

in cost of production, 68. 

kinds of, 277. 

railroads, 278, 299. 

remedies for railroad evils, 294. 

under Socialism, 15. 
Treasury notes of 1890, 115. 
Trust certificates, 314. 
Trusts, defined, 309, 314. 

federal control of, 322. 

government regulation of, 318. 

motives for formation of, 315. 

problems caused by, 317. 

regulation of, 461. 

remedies for evils of, 319. 

restriction in formation of, 27. 

Underwood tariff bill, 252. 

Undivided profits, 176. 

Unearned increment, 17. 

Unemployed, relief of, 380. 

Unemployment, 441. 

United States Bank, first, 195, 196, 200. 

proposed reestablishment of, 209. 

second, 195, 196, 198, 200. 
United States gold certificates, 113. 
United States notes, 114. 
United States silver certificates, 114. 
Unlimited liability, 308. 
Unskilled labor, 445. 
Urdahl, Th. K., The Fee System in the 

United States, 328. 
Use, value in, 38, 41. 
Use of capital, in relation to interest, 409. 
Usury and interest, 401, 404, 405. 
Utilities, public, 15, 326, 327. 
Utility, primary cause of value, 39. 

Valuation, physical, of railroads, 287. 
Value, cause of, 39. 

economic, 38. 

in exchange, 38, 41. 

in general, 37. 

in use, 38, 41. 

labor a cause of, 40. 

marginal, 42. 

money a measure of, 45, 116. 

theories of, 40. 
Value money, 109. 
Variations in price, kinds of, 52, 

laws of, 52. 
Variegated production argument for 
protection, 269, 272. 



Voltaire, 10. 

Von Ketteler, Bishop, Die Arbeiterfra^e 
und das Chris tenthum, 21. 

Wage earner, condition of, 438. 
Wages, a relative term, 263. 

Catholic doctrine of, 454. 

causes of low, 459. 

causes of rise of, 449. 

defined, 394, 436. 

family, 457. 

high wages in United States, 265. 

historical sketch of, 436. 

in cost of production, 68. 

independent of tariff policy, 265. 

intervention of state, 460. 

iron law of, 24, 451, 453. 

just, 458, 460. 

nominal, 439. 

personal, 457. 

piece, 439. 

productive theory of, 453. 

rate of, 447. 

real, 439. 

relation to profits, 422. 

relation to value of product, 422. 

sufficient, 457. 

theories of, 444. 

time, 439. 

under Historical School, 9. 

under Liberal School, 30. 

wages-fund theory, 448, 450. 
Wages-fund theory, 448, 450. 
Walker, Money, Trade, and Industry, 107, 
108, 121, 125, 148, 149, 150, 153, 
154, 156, 157, 158. 

on necessity of entrepreneur, 435. 

Political Economy, no, 414, 421, 432, 

433- 

Wages Question, 440, 451, 454. 
Walker tariff, 250. 

Walras, Professor, on rate of profits, 418. 
Walter, Wucher und Zins, 402, 404. 
Wants, artificial, 39. 

defined, S3- 

natural, 39. 

objects that satisfy, 34. 
War tariffs, 250. 
Water frame invented, 437, 438. 
Wealth, according to mercantile school, 

7. 
agriculture source of, 11. 
created by transportation, 276. 
defined, 33. 

effect of paper money on national, in. 
exchangeability of, 35. 
immaterial goods as, 36. 
individual, 36. 
labor a factor of, 35. 



48o 



INDEX 



Wealth, money as, 36. 

national, 36. 

per capita, 389. 

relation to ethics, 4. 

satisfaction of wants, 34. 

unequal distribution of, 384. 
White, Horace, Money and Banking, 
117, 132, 162. 

on defect of national bank system, 206. 
Wholesale markets, 47. 



Wilgus, H. L., A Study of the United 
States Steel Corporation in its Indi- 
vidual and Legal Aspects, 307. 

Wilson-Gorman tariff, 251. 

Women, labor of, 26, 27, 446, 448. 
restriction of labor, 461. 

Workingmen's insurance, 363. 

Yearbook Agricultural Dept., 88, 235, 
441. 



